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Author: 

Humphreys,  Alexander 
Crombie 

Title: 

Lecture  notes  on  some  of 
the  business  features  of... 

Place: 

[Hoboken,  N.J.] 

Date: 

1905 


MASTER    NEGATIVE   # 


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tute of  technology,  1905. 

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LIBRARY 


LECTURE  NOTES 


ON  SOME  OF  THE 


Business    Features 


OF 


Engineering 
Practice 


BY 


ALEX.  C.  HUMPHREYS,  M.  E.,  Sc.  D.,  LL  D. 

President  of  the  Stevens  Institute  of  Technology 


DEPARTMENT  OF  BUSINESS  ENGINEERING 

Stevens  Institute  of  Technology 

1905 


COPYRIGHT,  1905, 
BY   THE 

STEVENS  INSTITUTE  OF  TECHNOLOGY 


PUBLISHED  MARCH,  1905 


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4 


CO/fTE/fTS 

V     V     V 

Page 

INTRODUCTION.    President  Humphreys 5 

THE  POINT  OF  VIEW.    Mr.  Walter  C  Kerr.          ....  7 

NOTES  ON  CONTRACTS.    Mr.  Howard  E.  White.         ...  16 

GENERAL  NOTES.    President  Humphreys 48 

ACCOUNTING.    President  Humphreys.      .       .       .       .       .       .57 

ACCOUNTING  (Continued).    President  Humphreys.       ...  71 

ACCOUNTING  (Continued).   GENERAL  NOTES.    President 

Humphreys gg 

REPAIRS  AND  DEPRECIATION.  President  Humphreys.  .  96 
ACCOUNTING  AS  APPLIED  TO  DEPRECIATION. 

President  Humphreys j,, 

ACCOUNTING  AS  APPLIED  TO  DEPRECIATION 

(Continued).     President  Humphreys '.        .  i^q 

SYSTEMS    OF    CLASSIFICATION-'TAXES."      President 

Humphreys 

144 

ANALYSIS    OF   A    BALANCE    SHEET.      President   Hum- 
phreys   -- 

ANALYSIS  OF  DATA.    President  Humphreys 169 

ESTIMATES    AND    SPECIFICATIONS.     President    Hum- 
phreys   ,-^ 

^77 


410089 


I! 


INTRODUCTION. 

In  this  department  the  students  are  first  required  to  read  the 
"Reprints  of  Lectures  and  Papers"  which  were  gathered  together 
for  the  purpose  of  cultivating  in  them  a  more  sympathetic  atti- 
tude of  mind  towards  the  specific  instruction  which  is  in  part  cov- 
ered in  these  lecture  notes. 

In  writing  these  notes  and  in  putting  them  together  I  have 
made  no  attempt  to  avoid  repetition,  but  my  aim  has  been  rather 
to  consider  the  same  proposition  from  several  points  of  view  in  the 
hope  that  I  might  so  better  remove  the  difficulties  that  have  de- 
veloped in  the  work  of  the  class-room. 

Experience  with  three  senior  classes  has  convinced  me  that 
this  repeating  and  paraphrasing  is  required  to  enable  me  to  give 
inexperienced  students  a  firm  grasp  of  the  essentials  included  in 
my  course,  unable  as  I  am,  by  reason  of  insufficient  time,  to 
afford  them  the  advantages  of  extended  practice  in  examples. 

The  actual  repetition  is  far  greater  than  is  here  indicated,  for, 
in  my  lectures  as  delivered,  I  give  many  additional  examples  from 
my  own  experiences,  selected  to  meet  the  difficulties  of  the  stu- 
dents as  these  difficulties  become  apparent. 

I  do  not  hesitate  to  include  commonplaces.  My  hope  is  that 
especially  where  these  have  to  do  with  the  ethics  of  our  noble  pro- 
fession the  members  of  my  classes  will,  through  a  cultivated  re- 
ceptivity, come  to  accept  these  commonplaces  as  active  and  con- 
trolling truths. 

These  pages  are  placed  in  the  hands  of  the  students  so  that 
they  need  not  be  obliged  to  rely  solely  upon  my  spoken  words, 
but  may  have  something  to  study  outside  of  the  class-room  in 
preparation  for  examinations. 

Notwithstanding  the  fact  that  I  have  not  been  able  so  far  to 
cover  by  written  notes  all  of  the  matter  included  in  my  course, 
I  feel  that  the  students  should  be  able  to  prepare  on  all  I  present 
because  much  that  is  most  difficult  to  comprehend  is  here  given 


{ 


6  Business  Engineering. 

in  permanent  form  and  the  remainder  I  give  them  full  oppor- 
tunity to  discuss  with  me  in  class. 

The  notes  on  the  Law  of  Contracts  were  prepared  at  my  re- 
quest by  my  friend  and  counsel,  Howard  E.  White,  Esq.,  of  the 
New  York  Bar,  to  whom  I  wish  now  to  repeat  my  grateful  ac- 
knowledgments. 

The  commencement  address  to  the  Class  of  1904,  delivered 
by  Walter  C.  Kerr,  Esq.,  would  have  been  included  more  appro- 
priately in  the  "Reprints  of  Lectures  and  Papers,"  but  as  this  was 
not  feasible  I  have  reprinted  it  here  that  Mr.  Kerr's  sound  advice, 
so  admirably  presented,  may  be  preserved  for  future  classes. 

I  hope  that  I  may  be  able  to  develop  from  these  and  supple- 
mentary notes  a  text  book  on  the  business  features  of  engineenng 
practice,  based  upon  my  experiences  in  the  fields  of  Engineering 
and  Business  as  to  the  matter,  and  upon  my  experiences  in  the 
classroom  as  to  the  most  efficient  methods  to  be  employed  m 
presenting  this  matter  to  engineer-students  already  pressed  for 
time  in  which  to  perform  their  assigned  tasks. 

Alex.  C.  Humphreys. 


The  Stevens  Institute  of  Technology, 
hoboken,  n.  j. 


THE  POINT  OF  VffiW. 

(Address  to  the  graduating  class  delivered  by  Walter  C.  Kerr, 
Esq.,  at  commencement  exercises  of  Stevens  Institute  of 
Technology,  June  16,  1904-) 

It  is  a  pleasure  to  talk  to  a  lot  of  young  men  who  are  about 
to  become  engineers.  It  was  not  so  long  ago  that  I  came  to  your 
age  less  well  prepared,  perhaps,  than  any  of  you.  When  I  look 
back  at  the  engineering  education  through  which  men  of  my  time 
were  launched,  and  then  consider  the  training  you  have  had  and 
the  opportunities  before  you,  I  have  reason  to  wonder  why  I  am 

here. 

I  hesitate  to  advise  you.  You  have  already  had  so  much 
advice  that  I  do  not  know  whether  you  can  hold  more.  What  I 
can  say  in  a  few  minutes  will  amount  to  little,  so  let  me  use  these 
minutes  to  suggest  that  you  advise  yourselves  along  certain  lines 
which  I  will  propose  by  way  of  point  of  view.  If  you  look 
straight  you  will  see  straight.  You  cannot  think  wrong  and  act 
right.     Your  perspective  will  be  distorted  if  you  haven't  the  right 

point  of  view. 

You  are  leaving  a  good  institution  for  a  good  world.  Your 
Alma  Mater  has  built  up  around  you  excellent  facilities  for  giv- 
ing you  what  you  need,  and  other  institutions  have  likewise  cared 
for  their  own. 

The  so-called  liberal  education  has  always  been  highly  aca- 
demic. Trade  school  engineering  has  been  strictly  non-academic. 
The  two  have  joined  hands  fortuitously  in  our  modern  mstitu- 
tions.  The  liberal  education  has  become  less  and  the  technical 
more  academic,  with  advantage  to  both.  There  is,  however,  dan- 
ger of  engineering  education  growing  too  academic,  for  several 
reasons:  One  is  the  disposition  to  include  in  technical  training 
a  liberal  education,  which  of  itself  is  not  undesirable.  Another  is 
that  engineering  professors  often  lean  unduly  towards  academic 
views  and  processes,  and  thus  lose  touch  with  the  spirit  of  the 


8 


Business  Engineering. 


M 


engineering  world.  Greater  than  either  of  these  is  the  tendency 
of  all  things  to  move  in  the  line  of  least  resistance,  and  all  learn- 
ing which  depends  upon  the  intellect  alone  is  more  easily  acquired 
than  that  which  depends  upon  other  sources.  The  proof  of  this 
need  go  no  further  than  to  remember  that  no  literature  is  finer 
than  that  written  two  thousand  years  ago;  no  philosophy  has 
fundamentally  improved  upon  that  of  the  ancients;  the  highest 
flights  of  intellect  and  mathematics  were  reached  during  the  ages 
in  which  the  world  was  observed  to  be  composed  of  four  elements 
— earth,  air,  fire,  and  water. 

A  review  of  knowledge  shows  the  great  preponderance  of  the 
intellectual  over  the  material,  and  it  is  only  within  late  centu- 
ries, in  fact  almost  the  past  century,  that  the  human  mind  has 
seemed  capable  of  turning  from  the  lesser  resistance  of  intellectual 
attainment  to  the  greater  capacity  for  physical  observation  and 
comprehension.     We  have  but  recently  come  to  the  era  of  intense 
mental  operations,  dealing  with  laws  and  principles  which  require 
insight  greater  than  the  intellect  can  grasp  unless  aided  by  the 
senses.     Contrary,  therefore,  to  common  belief,  I  assert  that  the 
highest  refinement  of  knowledge  follows  from  the  highest  use  of 
the  senses ;  and  that  it  has  taken  thousands  of  years  of  pure  intel- 
lectual development  to  attain  a  state  in  which  the  powers  of  nature 
can,  through  the  human  intellect,  be  made  useful  to  mankind, 
and  add  largely  to  knowledge.     Do  not,  therefore,  get  a  wrong 
view  of  the  faculties  involved  in  science,  in  the  application  of  the 
laws  of  nature,  applied  mechanics,  and  the  powers  of  comprehen- 
sion which  underlie  engineering.     There  is  still  room  for  doubt 
—not  debatable  here— as  to  what  constitutes  liberal  education. 

I  hope  for  the  time  when  the  spirit  of  engineering  as  found 
in  practice  will  form  a  more  definite  part  of  engineering  educa- 
tion. This,  I  think,  must  come  through  the  professor  keeping  in 
close  practical  touch  with  the  engineering  worid.  There  are  vari- 
ous ways  in  which  this  may  be  accomplished,  but  I  know  of  none 
better  than  by  each  professor  doing  a  reasonable  amount  of  prac- 
tical work  for  commercial  purposes.  Under  some  conditions,  this 
may  be  consistently  accomplished  during  a  portion  of  the  time, 
but  I  am  inclined  to  think  that  eventually  our  professors  will  de- 


Lecture  Notes.  9 

vote  all  their  time  to  instruction  while  they  teach  and  go  period- 
ically into  the  worid,  a  few  years  at  a  time,  for  practice.  Thus  the 
professorial  life  would  not  be  so  exclusively  educational,  and  our 
growing  engineering  institutions  may  be  enabled  to  enlarge  their 
faculties  by  the  devotion  to  teaching  of  a  portion  of  the  time  of 
men  who  are  primarily  engaged  in  commercial  work. 

Now  that  you  have  your  so-called  education,  what  are  you 
going  to  do  with  it?    I  cannot  tell  you,  but  I  can  suggest  some 

points  of  view. 

Begin  by  forgetting  yourself.  All  thought  of  self  is  some 
form  of  selfishness,  and  selfishness  never  produced  anything  bet- 
ter than  more  selfishness.  It  often  breeds  something  worse. 
Genius  is  all  right  in  its  way,  but  it  will  not  do  your  work.  Get 
a  right  idea  of  work.  Remember  that  time  is  the  essence  of  most 
things,  and  is  not  inconsistent  with  thoroughness. 

We  hear  much  about  opportunities.  They  are  everywhere 
plentiful.  Remember  that  your  opportunity  is  the  little  one  that 
lies  squarely  in  front  of  you,  not  the  large  one  which  you  hope 
to  find  further  along.  Many  a  man  is  surrounded  with  opportu- 
nities who  never  seizes  one.  There  are  traditions  that  Adam, 
William  Tell,  and  Sir  Isaac  Newton  each  had  an  affair  with  an 
apple,  but  with  different  results. 

Your  first  duty  is  always  to  that  which  lies  across  your  path. 
The  only  step  which  you  can  take  in  advance  is  the  next  one. 
This  leads  to  a  simplicity  of  action  which  is  commendable.   Don't 

ramble. 

The  refinement  of  thought  which  is  apt  to  follow  high  train- 
ing often  leads  the  mind  to  overiook  simplicity  and  to  even  seek 
complexity.  The  wealth  of  modern  appliances  tends  likewise ;  and 
it  is  thus  easy  to  acquire  that  over-refinement,  often  termed  theo- 
retical, as  against  the  simplicity  which  is  called  practical. 

From  one  point  of  view  all  gradutes  can  be  divided  into  two 
classes :  those  who  think  their  knowledge  is  a  little  long  for  their 
opportunities ;  and,  those  who  think  most  anything  is  a  little  long 
for  their  knowledge.  Both  are  apt  to  think  that  the  knowledge 
they  have  acquired  will  become  the  essence  of  performance.  You 
will  soon  find  that  knowledge  hasn't  much  to  do  with  effective- 


10 


Business  Engineering. 


ness.  It  is  necessary,  only  as  words  are  essential  to  the  expres- 
sion of  thought.  You  will  find  knowledge  a  good  tool,  but  not 
the  vital  force  with  which  you  perform.  You  will  fall  back  upon 
human  effort  and  action,  and  find  that  it  is  the  human-engine  and 
not  the  knowledge-engine  that  does  the  work. 

Cultivate  singleness  of  purpose.    This  is  more  important  than 
you  may  think.     It  is  intuitive  with  the  comparatively  ignorant, 
and  often  absent  in  the  highly  trained.     We  are  frequently  sur- 
prised at  the  great  competency  of  the  ignorant  contractor  or  fore- 
man, on  whom  judgment  is  often  passed  by  saying  that  he  is  a 
practical  man  and  gets  results.     Analysis  will  show  that  his  best 
quality  is  singleness  of  purpose,  which  leads  him  to  vigorously  do 
the  one  thing  before  him,  without  distraction  following   from 
knowing  or  thinking  about  too  many  other  things.    The  broaden- 
ing power  of  education  and  training  increases  the  range  of  con- 
templation, but  unless  the  power  of  concentration  is  cultivated 
there  follows  a  tendency  to  scatter  instead  of  to  acquire  that  sin- 
gleness of  purpose  which  leads  to  effective  action.     David  Starr 
Jordan  has  said :  "The  purpose  of  knowledge  is  action.     But  to 
refuse  action  is  to  secure  time  for  the  acquisition  of  more  knowl- 
edge.    It  is  written  in  the  very  structure  of  the  brain  that  each 
impression  of  the  senses  must  bring  with  it  the  impulse  to  act. 
To  resist  this  impulse  is  to  destroy  it.     *     *     *     This  lack  of 
balance  between  knowledge  and  achievement  is  the  main  element 
in  a  form  of  ineffectiveness  which,  with  various  others,  has  been 
uncritically  called  degeneration."     Thus  President  Jordan  shows 
how  even  much  more  than  a  little  knowledge  may  be  a  dangerous 
thing.    The  highly-trained  man  therefore  needs,  as  a  complement 
to  his  training,  unusual  powers  of  concentration,  in  order  that  the 
virtue  of  singleness  of  purpose  may  not  be  lost.     This  faculty  a 
man  must  have  or  acquire  himself.     It  is  not  in  the  books.     It 
cannot  be  taught.    It  can  only  be  suggested  by  precept  and  ex- 
ample. 

From  directness  of  purpose  naturally  follows  diligence  in 
getting  what  you  go  after,  and  not  being  easily  turned  aside  by 
resistance.  When  you  are  getting  what  you  go  after,  get  it  all. 
Avoid  the  mediocrity  of  compromise.     Be  thorough  and  stand 


Lecture  Notes, 


II 


for  full  competency  in  everything,  from  main  essentials  to  details. 
Just  so  far  as  education,  assisted  by  concentration,  contributes  to 
singleness  of  purpose  it  is  useful,  but  where  by  length,  breadth  or 
depth  it  dilutes  human  effort,  it  lacks  value.    It  is,  therefore,  not 
so  much  the  question  how  much  educational  training  you  have  as 
it  is  how  you  use  it.    Some  can  use  a  little  with  great  effect,  be- 
cause their  point  of  view  is  right ;  others  scatter  so  badly  that  they 
cannot  use  their  knowledge  at  all;  while  some  distorted  mmds 
seem  to  have  a  faculty  for  misapplying  a  large  amount  of  acquired 
knowledge  through  complicated  processes  full  of  error.     To  be 
right,  you  must  be  lOO  per  cent,  right.     Charity  may  pardon 
human  nature  its  percentage  of  delinquency,  but  this  is  a  human 
matter.  The  laws  of  nature,  mathematics,  and  engineering  do  not 
pardon  anything.     The  man   may  therefore  be  absolved  from 
censure,  but  his  work  must  stand  the  rigid  test  of  inviolable  law. 
Nor  is  it  too  much  to  say  that  you  must  be  right  the  first  time. 
Much  of  our  engineering  is  only  done  once,  and  it  must  be  done 
right  that  once.    A  man  who  has  learned  by  experience  to  do  a 
thing  deserves  no  credit  for  doing  it  right.    He  is  then  only  a 
repeating  machine.     Real  power  is  characterized  by  ability  to 
perform  right  the  first  time  that  which  a  man  never  did  before. 
Such  performance  involves  the  power  to  assimilate  and  adapt  ex- 
periences, of  more  or  less  like  or  unlike  kind,  in  a  way  to  bring 
forth  correct  results.    This  is  the  true  use  of  experience,  wherein 
a  man  is  a  thinking,  active  power,  and  not  a  mere  repeater.  ^ 

Clearness  of  thought  is  an  essential  often  lacking.  This,  too, 
follows  from  concentration  and  singleness  of  purpose.  Many 
minds  confuse  themselves  with  a  wealth  of  ideas,  grading  from 
the  well  formed  to  hazy,  indistinct  conceptions.  You  can  clear  your 
mind  by  proper  habits  of  thought.  Train  yourself  to  separate  es- 
sentials and  non-essentials  and  confine  your  consideration  to  the 
essentials ;  to  distinguish  between  what  you  know  and  what  you 
only  vaguely  surmise,  clearly  eliminating  opinion  from  facts. 
Nothing  is  more  helpful  than  conference  with  yourself,  in  which 
you  determine  what  you  think  of  your  own  thoughts.  This  is 
aided  by  the  moderate  cultivation  of  system— thinking  in  an 
orderly  manner,  beginning  at  the  beginning,  ending  at  the  end. 


f^l 


12 


Business  Engineering. 


Lecture  Notes. 


13 


and  being  sure  to  have  a  middle.    With  this  there  should  be  no 
slavery  to  system,  but  let  each  find  his  own  logical  way. 

Besides  what  are  commonly  known  as  ideas,  men  have  intui- 
tions— sometimes  called  impressions  or  opinions — which  they 
cannot  readily  prove.  These  I  believe  are  identical  with  reason, 
except  that  while  reason  is  composed  of  a  sequence  of  distinct 
ideas,  each  capable  of  expression,  intuitions  follow  from  the 
capacity  of  the  human  mind  to  integrate  small  ideas  and  im- 
pressions, each  of  which  is  too  small  to  stand  alone,  or  to  be 
readily  expressed,  but  which  integrated  form  a  concrete  mental 
impression,  called  an  intuition,  and  which  is  of  exactly  the  same 
character  as  reason,  except  that  it  is  composed  of  smaller  and 
almost  intangible  units.  Do  not,  therefore,  discard  intuitions  as 
inferior  to  reason.  Analysis  will  sometimes  develop  intuition 
into  an  expressible  logical  thought. 

You  have  all  had  ideas  and  you  will  have  more  of  them. 
Some  ideas  seem  bigger  than  others.  These  mental  forces,  like 
other  forces,  only  do  work  when  in  motion.  Hence  your  ideas 
are  only  valuable  when  put  into  execution,  and  this  often  re- 
quires more  talent  than  to  originate  them.  Some  men  seem  to 
consider  their  ideas  so  good  that  they  will  execute  themselves. 
A  point  of  view  is  involved  in  the  power  to  rationalize.  This 
again  is  a  thing  which  each  man  does  for  himself  in  his  own 
best  way,  and  its  essence  consists  in  asking  one's  self  whether 
the  thing  is  reasonable.  It  is  a  great  check  upon  error.  It  ap- 
plies equally  to  nearly  everything  of  which  engineering  is  com- 
posed. It  is  the  power  of  the  human  mind,  after  performing 
in  more  or  less  systematic  and  conventional  ways,  to  stand  off 
and  look  at  results  and  ask  one's  self  whether  they  are  reason- 
able. One  man  will  figure  that  certain  material  weighs  two 
hundred  tons,  and  believe  it.  Another  will  say  that  there  is 
something  wrong  in  that,  for  it  all  came  on  two  cars. 

Every  young  man  comes  sooner  or  later  upon  a  dilemma,  in 
which  he  is  more  or  less  drawn  in  opposite  directions  by  his 
confidence  on  the  one  hand  and  timidity  on  the  other;  a  desire 
to  perform  backed  by  the  courage  of  his  convictions,  but  on  the 
other  hand  resisted  by  his  inability  to  see  his  way  through  in 


orderly  progression  to  a  desired  end.  This  is  about  the  time 
to  show  your  nerve.  Don't  be  dazed  and  baffled,  but  make  a 
start.  Use  your  wits  and  you  will  get  somewhere,  and  if  you 
cannot  always  see  the  end  it  will  constantly  get  nearer  and 
plainer  when  you  go  as  far  as  you  can  see  and  then  see  how 
far  you  can  go. 

Another  point  of  view  concerns  engineering  expression. 
This  may  be  through  designs,  drawings,  mathematical  determina- 
tions, or  words,  and  finally  by  work  done.  The  lamest  of  these  is 
words.  All  engineering  is  so  non-literary  in  character  that  the 
use  of  language  is  too  much  neglected,  leading  to  expressions 
that  do  not  properly  convey  thought.  In  engineering,  it  is  not 
rhetoric  but  diction  that  makes  expression  clear,  and  diction  is 
best  learned  from  the  dictionary.  It  is  well  for  a  young  engineer 
to  cultivate  his  vocabulary,  and  learn  to  use  words  in  their  right 
sense.  They  are  then  usually  understood,  even  by  those  who 
have  less  knowledge.  A  word  of  caution,  however,  against  as- 
suming that  a  lack  of  facility  of  expression  can  cloak  an  absence 
of  knowing  what  you  think.  Engineering  documents,  specifi- 
cations and  letters  are  full  of  mis-statements  due  to  the  careless 
use  of  language.  Conciseness  cannot  be  over-estimated.  Brev- 
ity is  desirable,  but  not  at  the  expense  of  clearness.  Conversely, 
a  certain  degree  of  facility  should  be  acquired  in  reading  the 
words  of  others.  Some  seem  incapable  of  understanding  plain 
language  when  spoken  or  written.  Anyone  persistently  failing 
to  understand  the  language  of  others  has  limitations  needing  cor- 
rection. 

One  of  the  worst  attributes  in  engineering,  and  which  is 
fundamentally  born  of  conceit,  tends  to  fasten  error,  censure,  and 
responsibility  on  others.  There  are  times  when  a  man  needs  to 
stand  himself  up  in  front  of  himself  and  ask:  What  is  the  matter 
with  me?  The  capacity  of  any  man  to  admit  his  own  error  and 
frailty  of  judgment  is  a  measure  of  strength  rather  than  weak- 
ness. 

Perhaps  no  personal  attributes  are  of  greater  importance  in 
the  conduct  of  the  business  affairs  of  an  engineering  life  than 
good  cheer  and  non-contentiousness.     Not  only  because  these 


1^ 


14 


Business  Engineering. 


ijji 

I 


fl 


are  right  and  agreeable,  but  because  they  enable  a  man  to  work 
better,  to  be  better  understood,  and  they  add  weight  to  his  opin- 
ions. There  is  a  certain  reasonable  optimism  of  manner  which 
makes  a  man  and  his  ideas  welcome,  even  though  they  must  of 
necessity  sometimes  be  critical.  To  vote  ave  and  believe  that 
things  can  be  done  makes  a  man  helpful  to  others  and  to  enter- 
prises.    Discontent  is  not  a  sign  of  progression. 

Each  of  you  probably  has  a  preconceived  notion  of  following 
some  line  of  engineering.     Be  careful  about  your  self-analysis. 
Ihe  field  IS  large  and  has  room  for  all  of  the  various  types  of 
men,,  some  of  whom  incline  to  constructive  operations,  others 
toward  inventive,  some  to  the  contemplative.     Again,  within  all 
these  divisions,  some  tend  towards  professional  and  others  trade 
work.     No  one  can  advise  what  is  best  for  you.     This  you  must 
find  out  for  yourself.     I  cannot  help,  however,  a  certain  predilec- 
tion in  favor  of  a  young  man  being  just  an  engineer,  and  not 
any  particular  kind  of  an  engineer—not  specializing  while  too 
young,  but  developing  along  versatile  lines,  ready  to  turn  his 
hand  equally  well  to  any  task  within  his  general  scope.     In  this, 
there  is  a  good  deal  in  the  point  of  view,  and  the  man  who  be- 
lieves he  can  apply  himself  in  one  direction  about  as  well  as 
another  will  come  nearer  doing  it  than  one  who  thinks  he  cannot. 
When  you  start  your  practical  work,  you  will  doubtless  try  to 
improve  things.     That  is  a  legitimate  purpose,  if  not  overworked 
I  am  not  going  to  attempt  to  tell  you  what  needs  improvement, 
but  the  one  improvement  that  most  things  need  is  in  the  line  of 
sufficiency.     You  can  think  this  over  for  yourself  and  apply  it 
where  it  fits. 

There  is  another  point  of  view  seldom  considered.  It  relates 
to  environment  and  the  power  to  vary.  It  is  pertinent  to  engi- 
neering. Man  ascended  through  and  exists  under  the  laws  of 
an  organic  evolution,  which  occurred  almost  entirely  in  early 
geological  ages,  under  water,  within  a  few  miles  of  shore,  under 
substantially  constant  temperature,  constant  pressure,  and  uni- 
form food  supply,  and  thus  in  about  the  simplest  possible  envi- 
ronment. It  was  caused,  primarily,  through  the  force  known  as 
the  power  to  vary,  and  the  reason  that  evolution  spanned  the 


Lecture  Notes. 


15 


space  from  the  simple  cell  to  the  vertebrate  animal  in  so  short 
a  time  was  that  this  power  was  not  resisted  by  complex  environ- 
ment. When  organisms  emerged  from  the  water  to  the  more 
complex  environment  of  the  land,  and  as  environment  grew  con- 
stantly more  intricate,  its  resistance  retarded  evolution  and  re- 
sulted in  fixation  of  species  until  ordinal  evolution  practically 
ceased.  It  is  the  complexity  of  the  environment  of  the  world 
that  presses  upon  you  and  tries  to  hold  you  back  from  the  ex- 
ercise of  your  native  power  to  vary.  A  good  environment  is 
certainly  less  harmfully  resistant  than  a  bad  one,  but  remember 
that  environment  is  not  a  force.  It  is  not  a  producer.  You  are 
the  producer.  Whatever  be  your  power  to  vary,  environment 
will  only  resist  and  reduce  it. 

Therefore,  remember  that  all  the  good  you  accomplish  is  go- 
ing to  come  out  of  yourself.  You  cannot  borrow  it  and  you 
cannot  make  it  out  of  that  which  has  been  poured  into  you  by 
education  or  otherwise.  All  that  you  receive  is  only  a  certain 
quantity  of  knowledge,  acquired  by  education,  experience,  or 
other  training,  which  will  have  a  certain  influence  upon  what 
comes  out  of  yourself  as  your  own.  It  is  the  inherent  capacity 
to  perform  with  your  own  brain  which  will  make  you  what  you 
become,  and  not  the  mere  transmission  of  that  which  you  have 
acquired.  Your  knowedge,  therefore,  is  of  little  avail  until  you 
make  it  inherently  a  part  of  yourself  through  mental  assimilation 
and  utilization.  The  clearer  you  comprehend  these  things,  the 
more  readily  you  can  make  use  of  them  as  against  the  process 
of  mere  acquirement  with  a  vague  motive  that  in  some  way 
or  other  what  you  acquire  may  be  of  benefit,  or  that  environment 
will  be  the  force  that  makes  your  talent  effective.  Some  have 
gone  through  experience  without  acquiring  it,  and  many  a  man 
who  has  received  an  education  has  not  got  any  because  he  al- 
lowed it  to  be  a  thing  apart  from  his  personality  and  it  slipped 
awav. 


■'mimmmmy^mmi^Mmsm^-j:- 


Lecture  Notes. 


17 


I        I 


t 


NOTES  ON  CONTRACTS, 

(Prepared  by  Howard  E.  White,  Esq.) 

Law  is  concerned  with  the  exposition  and  application  of 
those  principles  which  regulate  the  relations  of  man  to  man. 
Criminal  law  prescribes  and  enforces  the  duties  which  man  owes 
to  the  State  and  to  the  public  as  a  whole. 

Civil  Law  deals  with  the  private  relations  of  individuals  be- 
tween themselves,  and  finds  its  chief  end  in  preventing  the  occur- 
rence of  differences  in  the  manifold  activities  of  civilized  life,  or 
of  adjusting  such  differences  as  shall  have  arisen.  Law,  in  its 
broadest  sense,  is  based  upon  a  very  few  elementary  principles  of 
justice,  fairness  and  equity,  which  may  be  as  well  and  easily 
understood  by  the  layman  as  the  lawyer.  The  technical  niceties 
and  refinements  of  the  law  have  to  do  with  the  application  of 
these  principles  to  concrete  cases,  and  require  a  lifetime  of  unre- 
mitting research  and  study.  They  are  the  special  province  of  the 
lawyer. 

No  layman,  however  talented,  is  qualified  to  master  these 
legal  intricacies,  but  no  one,  however  small  his  business,  can  fail 
of  benefit  from  a  consideration  of  general  legal  principles.  The 
more  widely  they  are  understood  and  heeded  in  carrying  on  the 
everyday  affairs  of  life,  the  less  chance  there  will  be  of  entangle- 
ment in  tedious  and  expensive  litigation,  which  may,  whatever  its 
outcome,  ultimately  ruin  the  most  prosperous  business  or  cloud 
the  success  of  the  most  talented  individual. 

It  is  a  matter  of  common  experience  to  see  men,  eminent  in 
their  own  specialties,  so  ignorant  of  business  and  its  methods  as 
to  fail  of  success  when  they  attempt  to  practically  apply  their 
knowledge  and  talents. 

The  object  of  these  notes  is  not  to  attempt  to  impart  knowl- 
edge which  will  enable  a  layman  to  become  his  own  lawyer,  but 


rather  to  instill  a  knowledge  of  the  legal  necessities  of  business 
life,  and  to  make  possible  the  formation  of  a  correct  judgment  as 
to  when  legal  aid  should  be  retained. 

Money  wisely  spent  for  competent  legal  assistance,  when 
large  projects  are  in  their  inception,  is  likely  to  save  the  expen- 
diture of  a  much  larger  sum  in  an  attempt  to  correct  the  disas- 
trous result  of  a  careless  or  improvident  act. 

The  Law  of  Contracts  Important  to  Business  Men. 

A  generally  accepted  classification  divides  the  body  of  legal 
principle  into  two  parts : 

1.  Those  which  concern  Torts. 

A  Tort  is  the  violation  of  some  legal  duty  owed  by  one  indi- 
vidual to  another  and  existing  independently  of  any  contract. 

2.  Those  which  relate  to  Contracts. 

While  some  lawyers  make  a  specialty  of  the  former  class,  in 
which  are  comprised  suits  to  recover  damages  for  personal  inju- 
ries, by  far  the  larger  number  of  attorneys  are  concerned  almost 
exclusively  with  the  second  branch  of  the  law. 

Varied  as  the  activities  of  modem  civilization  have  become, 
it  still  remains  true  that,  broadly  speaking,  the  life  of  the  average 
business  or  professional  man  is  for  the  most  part  concerned  with 
making  and  performing  contracts.  In  the  last  analysis  almost 
every  action  of  the  day  brings  us  within  the  reach  of  some  con- 
tract, express  or  implied. 

Some  knowledge  of  contract  law,  therefore,  is  a  fundamental 
necessity  to  everyone.. 

What  Is  a  Contract  ? 

This  seems  a  simple  question  and  one  to  which  almost  every 
layman  feels  competent  to  respond.  An  attempt  to  do  so,  how- 
ever, shows  how  difficult  it  really  is  to  frame  a  definition  suffi- 
ciently broad  to  cover  the  multitudinous  varieties  of  contracts 
which  are  legally  possible. 

Almost  as  many  definitions  have  been  given  as  there  are  con- 
tracts.   A  sufficiently  simple  and  non-technical  one  is  as  follows: 

An  agreement,  enforceable  at  law,  creating  an  obligation  not 


i8 


Business  Engineering. 


Lecture  Notes. 


19 


theretofore  existing,  upon  the  parties  or  some  of  them,  to  do  or 
refrain  from  doing  some  lawful  act,  in  return  for  value  received. 
The  most  important  feature  of  a  contract  is,  of  course,  that  it 
is  the  basis  of  some  new  agreement.    It  is  creative,  and  by  it  the 
parties  voluntarily  assume  obligations  from  which  they  were  for- 
merly free.    The  importance  of  a  contract,  from  the  standpoint  of 
law/arises  from  the  fact  that,  whereas  it  is  created  by  the  volun- 
tary act  of  the  parties,  once  made,  it  will  be  enforced  by  the  courts, 
as  strictly  as  though  its  terms  were  a  part  of  the  statute  law  of 
the  State.    The  very  freedom  given  by  the  law  in  respect  of  con- 
tracts imposes  upon  the  contracting  parties  the  necessity  for  an 
added  measure  of  caution.   The  Courts  extend  no  protection  to 
the  maker  of  an  improvided  contract.     When  it  has  once  been 
signed  the  obligations  imposed  by  it  are  as  binding  as  though  its 
terms  were  of  the  most  advantageous  character.     The  law  sup- 
poses that  in  making  contracts  the  parties  themselves  are  best 
qualified  to  fix  its  terms,  and,  though  these  may  at  a  subsequent 
date  prove  oppressive,  the  law  will  extend  its  utmost  aid  to  their 
enforcement.     The  inviolability  of  contract  rights  is  most  jeal- 
ously guarded  by  the  law.     The  Courts  are  called  upon  to  con- 
sider more  cases  arising  out  of  contracts,  than  from  any  other 
source.    Out  of  the  infinite  variety  of  private  agreements  entered 
into  arise  an  infinite  number  of  variations  in  the  application  of 
established  principles.    To  cope  successfully  with  the  niceties  of 
interpretation  the  lawyer  must  be  possessed  of  acumen,  persever- 
ance and  genius.    This  is  the  technical  side  of  law. 

Executed  and  Executory  Contracts. 

Contracts  are  divided  as  respects  the  time  of  performance 
into  two  major  classes. 

1.  Executed. 

2.  Executory. 

In  the  first  class  are  included  those  contracts  which  are  per- 
formed, substantially  at  the  time  when  they  are  made,  or  so  short- 
ly after  as  to  make  the  whole  transaction  simultaneous,  as  in  the 
case  of  a  purchase  of  merchandise  followed  by  immediate  de- 
livery.   The  agreement  as  to  price  constitutes  a  contract,  which 


\ 


% 


\ 


is  immediately  executed  or  performed  as  the  buyer  departs  bear- 
ing his  purchase. 

An  executory  contract  is  one  in  which  a  substantial  lapse  of 
time  occurs  between  the  making  of  a  contract  and  the  carrying 
out  of  its  terms. 

It  is  to  the  executory  contract  that  we  usually  refer  when  we 
popularly  speak  of  a  contract,  and  it  is  with  that  branch  of  con- 
tract law  that  the  present  notes  are  concerned. 

A  large  number  of  the  contracts  entered  into  are  performed 
without  differences  between  the  parties.  But  it  is  certain  that 
no  contract  should  be  made  in  any  spirit  of  fancied  security  aris- 
ing from  this  fact.  The  best  of  friends  and  the  closest  business 
associates  are  prone  to  disagree,  and  the  better  the  friendship  and 
the  closer  the  association,  the  severer  the  breach.  Every  con- 
tract, therefore,  which  involves  future  performance  should  be 
regarded  with  respect  to  its  ability  to  stand  the  test  of  such  a 
disagreement  and  its  consequent  construction  by  the  courts.  It 
is  obvious  that  the  more  distant  the  time  of  full  performance  the 
more  chance  there  is  for  misunderstanding  and  difference. 

Express  and  Implied  Contracts. 

It  is  important  to  remember  that  not  all  contracts  are  re- 
duced to  writing,  or  even  orally  phrased.  It  sometimes  happens 
that  a  man  by  his  acts,  perhaps  unintentionally,  involves  himself 
in  certain  obligations  which  he  little  suspects.  This  fact  gives 
rise  to  another  subdivision  of  executory  contracts  into 

1.  Implied  Contracts. 

2.  Express  Contracts. 

I.  An  implied  contract  is  a  relationship,  which  springs  unbid- 
den from  the  surrounding  circumstances.  Certain  civil  acts  a 
man  cannot  commit  unless  he  would  accept  the  consequences. 
Thus,  if  a  merchant  delivers  goods  to  a  prospective  customer, 
without  order,  and  the  recipient  retains  and  makes  use  of  such 
goods,  the  law  implies  a  promise  or  contract  to  pay  for  them. 
Possibly  the  customer  was  ignorant  of  the  law,  and  never  in- 
tended to  pay  for  what  he  used,  but  he  may  be  forced  to  do  so. 


I  i 


20 


Business  Engineering. 


This  is  the  simplest  example  of  an  implied  contract,  but  it  often 
happens  that  very  complex  problems  are  presented  when  the 
question  arises  as  to  whether  an  individual  has  not  made  him- 
self liable  to  certain  obligations  by  a  course  of  dealings  which 
he  never  intended  should  have  such  a  result. 

An  implied  contract  is  a  pitfall  to  the  unwary,  and  is  referred 
to  here  by  way  of  warning.  Luckily  there  is  a  plain  danger  sign 
posted  at  its  margin,  obedience  to  which  will  prevent  danger.  It 
lies  in  the  business  maxim:  "Do  not  expect  to  get  something  for 

nothing/' 

It  may  sometimes  happen  that  this  law  may  be  violated  and 
the  offender  escape  scot-free,  but  its  disregard  always  raises  the 
danger  that  having  received  benefits  under  the  impression  that 
they  need  never  be  paid  for,  the  law  will  step  in  and  insist  upon 
a  just  compensation. 

It  is  always  safest  to  ask,  when  in  receipt  of  obvious  bene- 
fits: What  do  I  give  in  return?  Not  only  is  this  true  in  respect 
to  financial  matters,  but  as  well  in  matters  of  favor.  One  who 
grants  a  favor  will  some  day  expect  one,  and  generally  two,  in 

return. 

2.  Opposed  to  the  implied  agreement  is  the  Express  Con- 
tract, with  which  we  shall  chiefly  deal. 

An  Express  Contract  is  one,  as  its  name  implies,  which  is 
framed  either  orally  or  in  writing,  with  the  intent  by  the  parties 
to  enter  into  a  valid  binding  agreement. 

Examples  are  so  common  as  to  need  no  especial  mention. 

Written  and  Oral  Contracts. 

Except  in  instances  especially  covered  by  statutory  enactment, 
a  verbal  or  oral  contract  is  exactly  as  binding  as  one  in  writing, 
if  its  terms  be  sufficiently  proved.  The  attempt  to  do  so  is  often 
involved  in  insurmountable  difficulty.  For  this  reason,  if  for  no 
other,  the  question  of  oral  contracts  may  be  briefly  dismissed 
with  the  statement  that  they  should  never  he  entered  into  if  they 
can  possibly  be  avoided.  They  are  always  dangerous  and  give 
rise  to  more  litigation  and  discussion  than  can  well  be  measured. 

Insist  that  every  agreement  made  should  be  reduced  to  writ- 


\ 


Lecture  Notes. 

ing,  if  only  in  the  form  of  a  memorandum, 
trouble  be  avoided. 


21 


In  this  way  only  can 


Statute  of  Frauds. 

Some  contracts  must  by  statute  be  in  writing  in  order  to  be 
valid.  Thus,  in  every  jurisdiction  will  be  found  statutes  known 
as  the  Statutes  of  Fraud,  which  are  practically  uniform  everywhere, 
and  are  to  the  effect  that  all  contracts  for  the  sale  of  property 
in  excess  of  a  specified  amount  in  value ;  contracts  which  are  not 
to  be  performed  within  a  limited  time,  and  contracts  to  become 
responsible  for  the  actions  of  another  person,  must  be  in  writing 
and  signed  by  the  person  to  be  charged.     The  reason  for  such 

a  statute  is  obvious. 

Before  passing  to  a  consideration  of  the  essentials  of  a  con- 
tract, a  word  is  proper  as  to  the  expression  of  its  terms. 

Many  words  do  not  mean  a  good  contract.    Still  less  does  an 
excess  of  legal  terms  or  phraseology.     The  best  contract  is  the 
simplest  both  in  form  and  language.    As  in  every  other  written 
instrument,  brevity  should  be  sought,  though  not  at  the  expense 
of  clearness  of  expression.     If,  therefore,  a  contract  is  presented 
for  signature,  the  meaning  of  which  is  not  absolutely  clear,  signa- 
ture to  it  should  be  refused.    The  word  of  an  associate,  or  even  of 
an  attorney,  that  a  certain  unintelligible  phrase  has  a  definite 
meaning,  is  insufficient.  If  it  be  found  that  there  is  room  for  a  dis- 
cussion as  to  the  meaning  of  a  word,  it  should  be  remodeled  at  all 
hazards  until  there  can  be  no  two  opinions  as    to    the    intent. 
The  habit  of  careless  expression  leads  to  more  ambiguity  in  con- 
tracts than  any  other  one  cause,  and  it  is  absolutely  without  ex- 
cuse.    The  layman  falls  into  the  error  through  carelessness  or 
inadvertence.    At  times  the  lawyer  is  equally  negligent,  but  it  also 
frequently  happens  that  a  lawyer  attempts  to  draw  a  document  so 
artistic  in  its  brevity  and  conciseness  that  he  sacrifices,  more  or 
less  completely,  clearness  and  common  sense.     But  on  the  other 
hand  one  should  not  be  misled  into  thinking  that  the  best  lawyer 
is  one  who  draws  the  most  elaborate  or  impressive  contract.    The 
reverse  is  apt  to  be  the  case.    When  one  receives  from  an  attorney 
a  contract  which   appears   to  be    so  simple  that  it  seems   that  it 


I  ^ 


22 


Business  Engineering. 


might  well  have  been  drawn  without  legal  assistance,  it  is  certain 
competent  counsel  has  been  retained. 

The  foregoing  statements  have  been,  for  the  most  part,  ex- 
planatory and  analytical.  We  now  pass  to  the  essentials  of  a 
contract,  written  or  oral. 

Essentials  of  a  Contract. 

1.  Parties  capable  of  contracting. 

2.  A  lawful  subject  matter. 

3.  A  definite,  clear  offer. 

4.  An  unequivocal  acceptance. 

5.  Complete  agreement  of  parties. 

6.  Valid  consideration. 

I.  Parties  capable  of  contracting. 

Every  person  who-  has  attained  legal  age ;  who  is  under  no 
civil  or  mental  disability,  temporary  or  permanent,  and  is  free 
from  compulsion,  is  capable  of  entering  into  a  valid,  binding  con- 
tract. 

In  explanation  of   the   foregoing  the   following  should  be 

noted : 

Person. — The  word  person  includes  corporations  and  women. 
Corporations,  however,  must  act  within  the  scope  of  their  char- 
ter powers.  At  common  law  married  women  were  deemed  inca- 
pable of  contracting,  but  by  statute  in  practically  every  jurisdic- 
tion this  disability  has  been  removed,  and  they  may  contract  with 

entire  freedom. 

Legal  Age. — By  practically  universal  enactment  the  period 
of  infancy  terminates,  for  both  man  and  woman,  at  twenty-one 
years.  In  some  few  jurisdictions  women  are  deemed  of  age 
at  eighteen.    Local  statutes  should  be  consulted  upon  the  point. 

A  contract  made  by  an  infant  is  not  absolutely  void,  but 
may  be  avoided  by  the  infant,  who  cannot,  against  his  will,  be 
forced  to  perform  it.  There  are  only  two  exceptions  to  this 
rule :  One  is  that  an  infant  may  be  compelled  to  pay  for  necessi- 
ties furnished  for  maintenance  or  support.  The  other  is  that 
infancy  is  not  a  ground  for  breaking  the  marriage  contract.  It 
must  be  remembered,  however,  that  if  the  infant  be  willing  to 


Lecture  Notes. 


23 


abide  by  the  terms  of  his  contract  he  can  enforce  performance 
from  the  other  party  thereto.  In  other  words  the  defense  of 
infancy  is  only  available  to  the  infant  himself.  A  contract  made 
with  an  infant  during  his  minority  may,  however,  ripen  into  a 
valid  and  binding  contract  when  the  infant  becomes  of  age,  pro- 
vided, either  expressly  or  by  implication  from  his  actions,  he  rati- 
fies it  after  that  time.  Thus,  if  an  infant  makes  a  contract,  and 
after  becoming  of  age  accepts  benefits  under  it,  it  will  make  the 
contract  a  good  one.  The  infant  is  under  obligations  if  he  wish 
to  disaffirm  his  contract  to  do  so  within  a  reasonable  time  after 
he  becomes  of  age.  If  he  fail  to  take  such  action  it  is  an  implied 
ratification  of  his  prior  contract. 

If  the  infant  elects  to  rescind  his  contract  he  must,  so  far  as 
possible,  return  all  benefits  which  he  has  received  thereunder. 
Should  he  fail  to  do  so,  he  cannot  escape  liability  upon  his  agree- 
ment. The  general  view,  however,  is  that  the  infant  is  not  pre- 
cluded from  rescinding  his  contract  when  he  becomes  of  age  by 
reason  of  the  fact  that  it  is  physically  impossible  for  him  to  re- 
turn benefits  thereunder.  It  sometimes  happens  that  a  contract 
has  been  partially  performed  during  infancy,  and  that  the  minor 
has  received  some  advantage  therefrom.  He  may  have  received 
a  sum  of  money  for  a  piece  of  property  sold  by  him,  and  have 
spent  it  before  becoming  of  age.  He  may,  nevertheless,  recover 
the  property  from  his  vendee. 

At  first  glance  this  appears  to  be  a  hardship,  and  it  is  a 
doctrine  whch  is  frequently  criticised  by  laymen.  It  is  founded, 
however,  upon  the  very  reasonable  idea  that  one  who  deals  with 
an  infant,  does  so  at  his  peril,  a  minor  being  in  the  eye  of  the  law, 
not  competent  to  protect  his  own  interests.  The  law  takes  care 
of  this  anomalous  situation  by  allowing  the  appointment  of  a 
guardian  for  an  infant,  and  through  such  guardian  the  infant 
may  make  all  contracts  which  are  necessary  for  his  best 
interests. 

Civil  Disability. — In  England  and  many  of  the  United  States, 
criminals  convicted  of  felony,  are  debarred  from  exercising  civil 
privileges.    Imprisonment  for  life  is  accounted  civil  death. 

Mental  Disability. — Mental  disability  may  be  either  partial 


24 


Business  Engineering. 


Lecture  Notes. 


25 


or  total,  permanent  or  temporary,  and  arise  from  permanent  or 
acute  causes. 

One  whose  mind  is  clouded  to  such  an  extent  as  not  to 
understand  the  nature  of  the  act,  is  deemed  incompetent  to  con- 
tract, whether  such  condition  proceeds  from  insanity,  intoxica- 
tion or  the  use  of  drugs,  and  such  contract  is  avoidable  at  the 
option  of  the  person  so  incapacitated.  While  the  rule,  like  some 
others  stated  herein,  is  occasionally  modified  in  some  jurisdictions, 
the  prevailing  rule  in  the  United  States  has  been  given. 

Compulsion. — A  contract  cannot  be  enforced  against  a  person 
who  is  induced  to  enter  into  it  by  threats  of  personal  injury  to 
self  or  family,  or  of  illegal  detention  or  injury  to  property. 

The  foregoing  considerations  are  somewhat  technical ;  but 
they  have  been  stated  as  simply  as  possible.  For  practical  pur- 
poses, the  most  important  points  to  remember,  are  the  disability 
of  infants  and  the  limitation  of  the  power  of  corporations.  No 
important  contract  should  ever  be  made  with  a  corporation  with- 
out legal  assistance  to  discover  first,  whether  the  corporation  has 
power  to  make  the  agreement,  and  second,  whether  such  con- 
tract has  been  duly  authorized  by  the  directors,  and  authority 
delegated  to  the  officer  who  attempts  to  bind  the  company. 
2.  Lawful  subject  matter. 

It  is  the  policy  of  the  law  to  allow  the  utmost  freedom  of  con- 
tract, and  no  limitation  is  placed  upon  the  right  to  contract  save 
only  that  a  contract  may  not  be  made  to  do  an  act  which  is  for- 
bidden by  law,  or  one  which  is  opposed  to  public  policy.  Thus, 
one  cannot  contract  to  erect  a  building  in  violation  of  the  build- 
ing law,  nor  to  commit  a  felony  or  a  misdemeanor.  It  is  usu- 
ally simple  to  determine  whether  the  object  which  it  is  desired  to 
effect  is  forbidden  by  law.  It  is  not  always  easy  to  determine 
whether  the  object  is  contrary  to  public  policy.  Cases  fre- 
quently arise  which  appear  to  be  innocent  upon  their  face,  and 
which  to  the  lay  mind  seem  to  have  no  bearing  upon  any  indi- 
viduals other  than  the  parties  to  the  contract  themselves.  Upon 
a  closer  inspection,  however,  it  is  seen  that  they  affect  the  under- 
lying principles  upon  which  is  based  our  system  of  government. 
Thus,  it  is  the  policy  of  the  law  that  every  man  should  be  free 


V 


\ 


to  earn  a  living  as  he  will;  that  trade  should  not  be  unduly  ham- 
pered or  constricted;  that  gambling  should  not  be  encouraged, 
that  necessities  should  not  be  monopolized  or  the  price  thereof 
unduly  inflated.  An  agreement  to  do  any  of  these  acts  is  re- 
garded in  the  light  of  a  conspiracy  and  will  not  be  enforced  by 
the  court.  In  many  cases  one  who  is  not  a  party  to  the  con- 
tract may  prevent  the  carrying  out  of  its  provisions,  if  harmed 
thereby.  It  will  often  be  found  that  this  question  of  public  pol- 
icy will  confront  those  who  are  considering  contracts  to  restrict 
the  use  of  patented  articles,  or  to  limit  the  area  within  which 
parties  to  the  contract  may  practice  their  profession.  These 
questions  are  always  troublesome. 

3.  Definite  Offer. 

All  contracts  are  based  upon  an  offer  by  one  of  the  parties 
and  an  acceptance  by  the  other.  These  are  the  preliminary 
steps,  and  present  a  variety  of  interesting  questions.  Thus,  one 
offers  to  work  for  another  and  the  contract  is  concluded  by  the 
acceptance  of  the  proffered  services. 

The  offer  must  be  definite  and,  generally  speaking,  to  a  de- 
finite person.  A  vague  offer  makes  either  no  contract  at  all,  or  at 
most,  a  very  unsatisfactory  one.  In  the  interest  of  definiteness 
and  clearness  as  a  preliminary  to  a  contract,  the  following  warn- 
ing may  seem  to  be  timely:  A  neglect  to  consider  it  is  at  the 
bottom  of  a  large  percentage  of  the  difficulties  arising  out  of  con- 
tracts. One  who  proposes  to  make  a  contract  must  come  to  a 
clear  understanding  with  himself  in  respect  of  what  he  really  de- 
sires to  accomplish.  If  he  has  a  hazy,  indistinct  idea  of  the  obli- 
gations which  he  is  about  to  assume,  or  of  those  which  he  de- 
sires to  impose  upon  others,  he  is  almost  certain  to  make  an 
unsatisfactory  contract,  and  end  in  litigation. 

He  must  be  careful  not  to  confine  himself  to  a  consideration 
of  present  conditions.  A  contract  of  prolonged  duration,  which 
is  acceptable  to-day,  may  be  objectionable  next  year,  but  will 
not  be  in  any  degree  less  binding ;  dissatisfaction  is  not  a  ground 
for  cancelling  a  contract.  He  should  not  be  content  to  take  the 
opinion  of  those  with  whom  he  is  contracting,  as  to  what  he  de- 
sires, but  will  independently  and  carefully  consider  it  from  his 


26 


Business  Engineering. 


r 


p 


own  point  of  view,  and,  having  once  come  to  a  conclusion,  will 
not  be  moved  therefrom  in  essential  points.  Foresight  is  that 
quality  which  differentiates  the  successful  from  the  unsuccessful 
man,  and  in  making  contracts  no  other  quality  is  so  much 
needed.  A  most  frequent  difficulty  which  is  the  subject  of  re- 
peated comment  by  the  courts  in  rendering  their  decisions, 
springs  from  the  fact  that  one  of  the  parties  failed  to  give  suffi- 
cient thought  to  the  consequences  of  his  agreements,  or  to  an- 
ticipate conditions  which  a  few  moments'  careful  consideration 
would  have  made  plain  to  him. 

In  stating  that  once  having  arrived  at  an  opinion  one  should 
not  be  moved  therefrom,  it  is  not  intended  to  counsel  a  spirit 
of   uncompromising   stubbornness,    which    would   probably   re- 
sult in  a  failure  to  make  a  contract.     Every  agreement,  when 
finally  executed,  usually  contains  concessions  from  the  original 
propositions  made  by  the  parties,  and  one  should  be  ready,  after 
having  determined  what  self-interest  dictates,  to  make  conces- 
sions at  such  points  as  are  possible.     But  this  should  not  be 
done  Ughtly  or  unadvisedly.     A  concession  made  in  a  thought- 
less moment  and  without  due  consideration,  may  mean  years  of 
litigation    and   financial   loss.     In   making   propositions    or   de- 
mands, however,  it  is  essential  to  regard  the  interest  of  the 
other  party  to  the  contract.     Fairness  to  others  is  one  of  the 
secrets  of  personal  success.     If,  therefore,  one  approaches  the 
making  of  a  contract  with  an  apparent  unwillingness  to  regard 
any  but  self-interest,  and  an  obvious   desire   to  reap  all  the  ad- 
vantage possible  without  regard  to  the  equities  existing  in  favor 
of  the  other  parties  to  the  contract,  though  the  negotiations  may 
terminate  in  an  agreement  of  some  form,  it  will  lack  the  surest 
guarantee   of   successful   performance,   mutual    confidence    and 
trust,  without  which  the  strongest  contract  may  be  turned  into  a 
bone  of  contention  and  the  most  promising  prospects  ruined. 

Having  definitely  determined  upon  the  offer,  it  must  be  com- 
municated in  any  appropriate  way,  orally  or  in  writing,  by  letter 
or  telegram.  In  the  interest  of  accuracy,  however,  the  offer 
should,  whenever  possible,  be  reduced  to  writing. 

The  offer  is  a  nullity  until  it  is  actually  brought  to  the  notice 


Lecture  Notes. 


27 


of  the  person  to  whom  it  is  made,  and  may  be  withdrawn  at  any 
time  before  it  is  accepted,  notwithstanding  a  voluntary  state- 
ment that  it  may  remain  open  a  definite  time.  Thus,  an  offer 
sent  by  letter  may  be  withdrawn  by  telegram  reaching  its  desti- 
nation before  the  letter,  or  before  acceptance. 

4.  Unqualified  acceptance. 

From  the  foregoing  it  is  plain  that  acceptance  should  be 
prompt,  if  a  contract  is  desired.  Such  acceptance  must  be  of  the 
exact  terms  of  the  offer.  A  counter  proposition  is  not  an  ac- 
ceptance and  simply  leads  to  further  negotiations  and  a  new 
offer.  To  constitute  a  contract,  it  must  be  possible  for  the  one 
to  whom  the  offer  is  made  to  say  simply  "I  accept  your  offer." 

Like  the  offer,  the  acceptance  may  be  communicated  in  any 
convenient  form,  but  unlike  the  offer,  the  acceptance  becomes 
binding  the  instant  it  passes  beyond  the  control  of  the  accepting 

party. 

Thus,  the  instant  an  acceptance  is  placed  in  the  mail,  or  dis- 
patched by  telegraph,  it  becomes  binding  and  the  contract  is 
complete  possibly  some  time  before  the  acceptance  becomes 
known  to  the  maker  of  the  offer.  Thereafter  it  is  impossible 
for  either  party  to  withdraw  from  the  contract  unless  by  consent. 
This  fact,  it  will  be  observed,  often  embarrasses  one  who  makes 
an  offer  and  wishes  to  withdraw  it.  Cautious  business  men  heed 
the  advice  of  Sir  Frederick  Pollock,  who  once  said: 

'The  practical  conclusion  seems  to  be  that  every  prudent 
man  who  makes  an  offer  of  any  importance  by  letter,  should  ex- 
pressly make  it  conditional  on  his  actual  receipt  of  an  acceptance 
within  some  definite  time." 

5.  Complete  agreement. 

Closely  akin  to  the  necessity  of  an  explicit  acceptance,  is  the 
rule  that  the  minds  of  the  parties  to  a  contract  must  be  in  com- 
plete accord.  This  is  known  as  the  "Meeting  of  the  minds  of  the 
parties,"  and  no  contract  is  complete  without  it.  A  contract, 
valid  in  all  other  respects,  may  subsequently  be  avoided  or  re- 
scinded if  it  appear  that  the  parties  had  not  arrived  at  this  meet- 
ing of  the  minds. 

Such  a  situation  arises  when  to  all  appearances  the  parties 


..  «««J*««li»ft««»«'*'5*»******' 


28 


Business  Engineering. 


have  agreed,  but  in  reality  have  never  come  to  an  understanding. 
The  cases  when  this  occurs  are  generally  divided  into  the  fol- 
lowing classes: 

a.  Mistakes  of  fact. 

b.  Misrepresentation. 

c.  Fraud. 

d.  Undue  influence. 

0.  Mistake  of  Fact.— It  sometimes  occurs  that  all  the  parties 
to  a  contract  are  misled  as  to  the  subject  matter  of  their  agree- 
ment.    Thus,  a  cargo  of  grain  was  sold  while  in  transit  by  sea 
to  London.     It  subsequently  appeared   that  prior  to   the  sale 
the  cargo  had  been  destroyed.     It  was  held  that  the  sale  was  m- 
valid.     Similarly,  where  a  contract  was  made  to  dig  a  thousand 
tons  of  potters'  clay  yearly  from  certain  territory,  and  it  subse- 
quently transpired  that  at  the  time  of  making  the  contract,  there 
was  not  so  much  as  one  thousand  tons  of  clay  under  the  land, 
the  agreement  was  declared  void.     Again,  A  may  agree  to  sell 
to  B  a  horse  (meaning  a  certain  bay).     B  agrees  to  purchase  the 
horse,  supposing  it  to  be  another  animal.     No  contract  ensues. 
It  is,  of  course,  obvious  that  to  avoid  the  contract,  the  mistake 
must  be  in  respect  to  some  vital,  material  point. 

These  mutual  mistakes  are  comparatively  rare  and  do  not, 
ordinarily,  cause  great  difficulty.  Much  more  intricate  are  the 
questions  involved  in  the  following  cases: 

b.  Misrepresentation.— It  sometimes  happens  that  one  party, 
without  evil  intent,  unintentionally  misstates  facts,  or  misleads 
the  other  party.  This  is  known  as  misrepresentation,  and  must 
be  carefully  distinguished  from  fraud  where  the  deception  is  m- 

tentional. 

Where  the  misrepresentations  occur  in  prelimmary  negotia- 
tions, they  have  no  effect  upon  the  validity  of  the  contract,  unless 
the  relations  between  the  contracting  parties  were  such  that  they 
owed  to  one  another  some  special  duty  of  exact  and  explicit 
statements.  Such  is  the  case  when  the  parties  occupy  a  confi- 
dential relationship  to  one  another,  as  that  of  principal  and  agent, 
attorney  and  client,  and  the  like.  Such  a  situation  also  arises 
where  from  force  of  circumstances  one  party  must  rely  upon 


V 


I 


; 


Lecture  Notes. 


29 


\ 


the  other  for  his  knowledge  of  the  facts.    In  this  case  the  other  is 
bound  to  the  utmost  good  faith. 

But  it  sometimes  happens  that  instead  of  the  innocem  m  s- 
representations  being  prehminary  to  the  contract,  they  actually 
become  an  integral  part  of  it,  and  the  inducing  cause  for  makmg 
it  The  representation  then,  amounts  practically  to  a  cove- 
nant or  warranty,  and  if  false,  may  be  made  the  basis  for  a  can- 
cellation of  the  contract.     A  single  instance  will  suffice: 

A  being  about  to  sell  a  horse  to  B,  without  any  guarantee, 
says  "the  horse  is  sound."  B  buys  and  finds  a  defect;  he  cannot 
rescind.  But  if  A  says  "I  warrant  the  horse  sound,  and  a  blem- 
ish appears,  the  transaction  is  a  nullity. 

The  practical  application  of  this  doctrine  to  business  men  is 
that  they  should  show  extreme  care  in  making  hasty  or  thought- 
less statements  in  entering  into  a  contract.  I^t  all  information 
which  is  given  be  such  as  may  be  substantiated  by  proof,  and  let 
no  guarantees  be  made  which  cannot  be  performed. 

This  leads,  naturally,  to  a  consideration  of  a  kindred  nature 
The  surest  way  to  promote  litigation  over  a  contract,  and  to  land 
in  an  endless  maze  of  trouble  and  difficulty,  is  to  have  a  party  to  a 
contract  fail  to  appreciate  the  true  significance  of  what  he  is 
doine     We  have  adverted  to  the  necessity  of  a  complete  knowl- 
edge of  one's  own  position.    It  is  equally  essential  that  all  parties 
should  appreciate  their  responsibilities.    It  is  a  matter  of  frequent 
occurrence  to  have  a  client  request  his  attorney  to  so  phrase  cer- 
tain portions  of  his  contract  so  that  he  may  create  an  obligation 
upon  the  other  side   which  will  not  be  suspected  at  the  time  the 
contract  is  made.    Nothing  is  more  foolish  or  short  sighted,  and 
no  wise  attorney  will  accede  to  such  a  request.    The  reasons  are 
obvious      If  the  obligation  is  one  which  should  in  fairness  be 
assumed,  it  should  be  stated  openly  and  frankly.    If,  on  the  con- 
trary it  is  of  such  a  nature  that  the  contract  would  fail  of  con- 
summation if  it  were  expressed  in  the  instrument,  an  unfair  ad- 
vantage is  about  to  be  taken,  and  when  subsequent  to  the  making 
of  the  contract  its  true  meaning  is  disclosed,  it  will  result  m  one 
of  two  things.    It  may  be  that  the  agreement  will  have  been  in- 
serted in  such  a  skillful  manner  that  it  can  be  enforced,  m  which 


30 


Business  Engineering. 


case  the  advantages  gained  therefrom  will  be  at  the  expense  of 
confidence  and  good  will;  or,  as  more  frequently  happens,  the 
contracting  parties  will  be  involved  in  a  lawsuit,  which  may  ex- 
tend to  the  third  and  fourth  generation  of  their  descendants. 

c.  Fraud. — Fraud  is  zuillful  misrepresentation  or  suppression 
of  a  material  fact  made  by  one  party  with  intent  to  induce  an- 
other party  to  enter  into  a  binding  agreement,  and  which  has  such 
a  result.  Fraud  is  always  a  complete  ground  for  the  rescission 
of  a  contract,  and  no  agreement  can  survive  its  taint. 

Every  word  in  the  foregoing  definition  is  essential,  and  the 
elements  of  fraud  are  carefully  stated.  It  must  be  willful  and  in- 
tentional; calculated  to  work  injury,  and  result  in  it. 

Cases  of  willful  affirmative  deception  are  comparatively  sim- 
ple. Usually  the  only  question  is  as  to  whether  such  deception 
relates  to  a  material  point. 

A  much  more  difficult  problem  arises  when  we  consider  the 
question  of  a  suppression  of  material  knowledge.  What  facts  is 
one  bound  to  reveal  in  order  to  avoid  the  taint  of  fraud  ? 

On  the  one  side  is  the  danger  of  fraudulent  suppression  of 
fact;  on  the  other  is  the  quixotic  impulse  to  disclose  all  that  is 
known,  including  legitimate  special  knowledge  or  business  secrets. 
Thus  one  may  buy  a  house,  knowing  of  impending  developments 
which  may  enhance  its  value.  No  obligation  exists  to  disclose 
such  knowledge.  But  if  a  man  sells  to  another  stock,  which  from 
special  knowledge  he  knows  to  be  worthless,  it  is  as  obviously  a 

fraud. 

Unquestionably,  the  line  is  a  fine  one  between  the  two  cases. 
But  consider  that  in  the  second  instance  the  seller  by  accepting 
payment  impliedly  sold  something  of  value,  and  the  case  is  prac- 
tically similar  to  one  of  willful  misrepresentation.  Here  then 
is  the  test.  When  the  suppression  of  facts  amounts  to  a  false  rep- 
resentation that  they  do  not  exist,  then  the  element  of  fraud  is 
present. 

But,  after  all,  the  best  safeguard  to  business  men  against 
charges  of  misrepresentation  or  fraud  is  a  high  standard  of  busi- 
ness ethics,  which  makes  one  willing  to  forego  profits  which  might 
be  gained  by  sharp  practice  or  doubtful  methods. 


Lecture  Notes. 


31 


I 


'( 


I 


While  such  distinctions  as  have  been  suggested  above  are 
sometimes  difficult  to  phrase  in  words,  no  man,  whatever  his 
character,  finds  any  trouble  in  practically  determining  whether  his 
acts  are  such  as  conform  to  the  generally  accepted  standard  of 
moral  duty.  However  far,  personally,  he  may  have  departed  from 
a  high  standard  of  personal  rectitude,  and  however  successful  he 
may  have  become  in  stilling  the  voice  of  his  conscience,  that  arbi- 
ter of  duty  never  dies,  and  if  questioned  will,  with  the  same 
certainty  with  which  the  magnetic  needle  points  to  the  north,  m- 
dicate  conduct  which  would  willingly  be  submitted  for  public  ap- 
proval, and  that  which  would  preferably  be  concealed  from  gen- 
eral knowledge. 

Such  words  are  not  mere  ethical  theories,  but  point  the  way 
to  the  most  practical  test  a  business  man  can  apply  when  in  doubt 
about  the  legal  aspect  of  a  proposed  course  of  action.  Let  the 
question  be  asked:  "Would  I  be  entirely  willing  to  have  such 
action  generally  known  among  my  friends  and  business  asso- 
ciates?" If  the  question  can  be  honestly  answered  in  the  affirm- 
ative, no  fear  need  be  felt  that  the  proposed  course  of  dealing  will 
ever  be  branded  by  the  law  as  fraudulent  or  worthy  of  condem- 
nation. 

If  the  question  be  answered  in  the  negative,  it  is  certain  that, 
while  such  method  of  business  dealing  may  in  any  single  instance 
add  to  pecuniary  prosperity,  it  will  in  the  long  run  mean  loss  of 
reputation  and  the  confidence  of  the  business  community,  as  well 
as  make  extremely  likely  ultimate  censure  from  the  courts. 

If  error  must  be  committed,  let  it  be  upon  the  side  of  over- 
fairness  to  business  associates  rather  than  upon  that  of  unscrupu- 
lous methods. 

d.  Undue  Influence. 

When  an  individual  is  so  situated  that  the  will  has  become 
subservient  to  another's  to  a  point  where  independent  action  is 
practically  impossible,  such  individual  is  said  to  be  unduly  in- 
fluenced. 

The  most  obvious  example  of  such  a  condition  is  where  one 
who  is  of  feeble  mental  powers  comes  so  under  the  power  of  a 
stronger  personality  as  to  yield  unquestioning  obedience.      The 


.^i^w^ipnnMiilBHSiwakn 


I'  ^ 

? 


n 


32 


Business  Engineering. 


dependent  person  need  not  be  of  unsound  mind  (which  would 
make  him  incapable  of  contracting)  in  order  to  justify  the  court 
in  saying  that  agreements  made  by  him  under  such  influence, 
lack  the  essential  element  of  a  complete  meeting  of  the  minds. 

Such  cases  most  frequently  arise  in  instances  of  persons  of 
advanced  age,  or  in  unusually  dependent  circumstances. 

A  contract  entered  into  between  such  a  person  and  the  one 
who  is  in  a  position  to  unduly  influence  the  judgment,  by  which 
the  latter  benefits,  is  always  scrutinized  minutely,  and  is  more 
than  likely  to  be  set  aside. 

Sometimes  this  undue  influence  arises  from  the  possession  of 
a  real  or  apparent  authority,  sometimes  from  the  necessity  or 
distress  of  the  injured  party.     The  result  is  the  same. 

When  one  who  is  to  be  benefited  thereby,  enters  into  a  con- 
tract with  another  who  is  dependent  upon  him  either  for  advice  or 
assistance,  it  should  be  insisted  that  the  contract  be  submitted  to 
some  disinterested  person  before  execution.  In  this  way  will  be 
avoided  serious  complications  and  charges  of  bad  faith  which  may 
be  as  painful  as  they  are  untrue. 

Duress,  to  which  reference  has  been  previously  made,  is  some- 
times considered  in  the  light  of  an  obstacle  to  the  complete  meet- 
ing of  the  minds,  but  the  writer  prefers  to  treat  it,  as  has  been 
done,  as  a  condition  which  incapacitates  the  party  affected  by  it, 
from  entering  into  a  valid  contract. 

6.  Valid  Consideration. 

While  the  law  does  not  concern  itself  with  the  details  of  con- 
tracts made  for  legal  purposes,  and  will  enforce  them  according 
to  their  terms,  there  is  one  element  which  is  essential  to  their  va- 
lidity. Some  return  must  be  given  for  every  promise  made  or 
right  surrendered.  This  return  is  the  consideration  for  the  con- 
tract. It  must  be  present  in  every  contract  in  some  form  or 
another.  If  absent,  the  contract  cannot  be  enforced,  for  it  is 
clear  that  if  one  promise  to  do  something  for  another,  and  re- 
ceive no  benefit  from  so  doing,  he  cannot  be  forced  to  fulfill  his 
contract.  A  few  examples  of  the"  plainer  or  simpler  character 
will  make  this  clear. 


) 


( 


( 


( 


Lecture  Notes. 


33 


1.  A  man  agrees  to  build  a  machine  for  another  who  agi-ees 
to  pay  a  stated  price  therefor.  The  contract  is  a  valid  one  and 
may  be  enforced.  The  consideration  for  the  promise  to  build 
the  machine  is  the  promise  to  pay  the  agreed  price,  and  vice 
versa. 

2.  A  promises  to  build  a  machine  for  B,  but  B  makes  A  no 
promise  that  he  will  either  accept  or  pay  for  it.  The  contract  is  ab- 
solutely void  and  unenforceable.  There  is  no  consideration  for 
A's  promise. 

These  are  simple  forms  and  might,  perhaps,  have  been  given 
from  general  knowledge  by  any  layman.  All  contracts,  how- 
ever, are  not  simple  and  it  is  often  difficult,  if  not  impossible,  to 
determine  whether  a  valid  consideration  has  been  given  or  not. 
Thus,  it  is  not  a  valid  consideration  for  one  to  agree  to  do  what 
he  is  already  under  obligation  to  do.  If  A,  therefore,  promises 
to  pay  B  a  debt  which  is  already  due,  it  would  not  serve  as  a  con- 
sideration for  B's  promise  to  build  a  machine,  but,  on  the  other 
hand,  A  might  agree  with  B  that  if  B  would  build  the  machine, 
A  would,  for  a  definite  period,  not  compete  with  B  in  his  bus- 
iness in  a  specified  locality.  This  consideration  would  be  suffi- 
cient. 

To  put  it  in  its  simplest  form,  therefore,  if  one  desires  to  en- 
force a  provision  of  a  contract  for  his  own  benefit,  he  must  make 
sure  that  he  has  given  some  value  to  the  person  with  whom  he  is 
contracting,  in  return  for  the  benefit  he  is  to  receive  from  him. 

The  first  question,  therefore,  which  a  business  man  will  ask 
himself  when  about  to  make  a  contract  is,  what  will  he  give  in 
return  for  that  which  he  expects  to  receive?  He  must  give 
something.  What  is  given  is  not  altogether  material.  The  law 
will  not  pass  upon  the  question  as  to  whether  adequate  value  is 
given  for  what  is  received  further  than  to  say  that  the  relation 
between  what  is  given  and  what  is  received  must  not  be  so  dis- 
proportioned  as  to  be  palpably  unfair  or  unjust.  Thus,  if  one 
offers  to  sell  a  horse,  and  the  buyer  agrees  to  pay  $50  therefor, 
it  is  a  complete  consideration,  although  the  horse  may  really  be 
worth  $250.  If,  however,  the  buyer  agrees  to  pay  but  $1,  and 
the  horse  was  shown  to  be  worth  $1,000,  it  would  probably  be 


54 


Business  Engineering. 


said  that  there  was  no  consideration.  It  must  be  at  once  ap- 
parent that  this  is  a  fruitful  subject  for  discussion  in  the  courts, 
although  the  usual  determination  is  that  the  court  will  not  pass 
upon  the  adequacy  of  the  consideration,  so  long  as  a  consideration 
existed  at  all  and  is  not  unconscionably  small. 

The  particular  character  of  the  consideration  or  value  which 
is  given  for  what  is  received,  is  not  important.  It  may  take  a 
variety  of  forms.  As  has  been  previously  stated,  it  may  be  the 
payment  of  a  specified  sum  of  money;  it  may  be  the  perform- 
ance of  work  or  services ;  it  may  be  an  agreement  to  refrain  from 
doing  certain  acts;  it  may  be  the  suffering  of  some  harm  or  detri- 
ment; it  may  be  the  foregoing  of  some  legal  right;  but  in  the 
last  analysis,  something  must  have  been  given  up,  or  the  con- 
tract is  unenforceable. 

If  a  complicated  contract  is  being  negotiated,  it  may  be  that 
the  real  consideration  which  will  support  it  is  something  totally 
different  from  the  conception  of  the  parties.  It  is  the  business 
of  the  attorney  to  see  that  this  consideration  exists,  or  is  made 
to  exist,  and  that  it  should  appear  in  the  contract.  Many  a 
valuable  contract  has  been  lost  by  reason  of  a  failure  to  properly 
express  the  consideration.  Let  no  one  be  deluded  by  the  fact 
that  a  contract  bears  a  seal,  or  that  it  contains  the  usual  clause 
"in  consideration  of  One  Dollar."  Both  of  these  safeguards  will 
prove  broken  reeds,  if  no  true  consideration  exists. 

Formalities  Attending  the  Making  of  Contracts. 

Mention  has  previously  been  made  of  the  necessity  of  having 
contracts  in  writing.  It  was  stated  that  it  was  not  always  neces- 
sary to  have  the  written  instrument  of  a  very  elaborate  character. 
A  few  words  in  connection  with  the  form  of  contracts  may  not 

be  amiss. 

Every  contract  should  be  signed  by  all  the  parties.  A  seal 
should  be  affixed  for  the  purpose  of  raising  the  presumption  that 
a  consideration  exists  for  the  agreement.  Originally,  at  com- 
mon law,  the  seal  was  conclusive  evidence  of  consideration,  but 
the  development  of  law  has  resulted  in  almost  every  jurisdiction 
in  doing  away  wholly,  or  in  part,  with  the  distinction  between 


Lecture  Notes. 


35 


sealed  and  unsealed  instruments.  A  seal  has  the  added  effect  of 
prolonging  the  time  within  which  actions  to  enforce  the  contract 
must  be  brought.  Thus,  in  New  York,  an  action  on  a  contract 
without  seal,  must  be  brought  within  six  years,  while  twenty  years 
is  given  within  which  to  sue  upon  a  sealed  instrument. 

Contracts  with  corporations  must  always  bear  the  seal  of 
the  company.    It  is  the  legal  sign  manual  of  the  corporation. 

The  form  of  the  seal  is  immaterial,  and  in  most  states  a  scroll, 
or  the  word  "Seal"  written  by  hand,  is  sufficient. 

The  question  is  frequently  raised,  whether  it  is  necessary  to 
have  the  signatures  to  a  contract  attested  before  a  notary.  If  it 
is  intended  to  have  the  instrument  publicly  recorded,  it  is  in  al- 
most every  jurisdiction  necessary  that  it  should  be  acknowledged. 
For  instruments  which  are  not  to  be  so  recorded,  there  is  no  abso- 
lute necessity  either  for  an  acknowledgment  or  for  a  witness. 
It  is,  however,  desirable  in  every  case  to  have  a  witness,  if  possi- 
ble, and  to  have  the  paper  acknowledged  when  it  can  be  con- 
veniently done.  This  springs  from  the  fact  that  such  a  witness 
or  acknowledgment  facilitates  the  proof  of  the  instrument.  Every 
evidence  of  care  in  the  signing  of  a  contract  adds  to  the  force  of 
its  contents.  In  addition  to  this,  the  acknowledgment  before  a 
proper  officer  fixes  absolutely  the  date  upon  which  the  instru- 
ment was  in  existence  and  in  force.  This  is  often  a  most  im- 
portant point.  It  is  hardly  necessary  to  say  that  every  contract 
should  be  dated,  and  should  contain  in  the  body  of  it  a  clear  state- 
ment as  to  the  date  when  the  contract  became  effective,  its  dura- 
tion and  its  termination.  All  contracts  should  be  executed  at 
least  in  duplicate,  and  no  one  should  ever  allow  any  contract  which 
has  been  signed  to  go  out  of  his  possession  without  retaining 
either  such  duplicate  original,  or  a  copy  thereof  which  is  abso- 
lutely correct.  In  these  days  of  carbon  copies,  it  is  quite  common 
to  consider  a  copy  complete  which  contains  only  the  body  of  the 
contract.  All  original  dates  and  signatures  should  also  be  copied 
upon  the  carbon  reproduction. 

Having  considered  the  questions  preliminary  to  or  connected 
with  making  a  contract,  we  now  pass  to  the  consideration  of  sub- 
sequent rights  and  liabilities  thereunder. 


36 


Business  Engineering. 


Termination  by  Limitation  or  Consent. 

It  is  quite  possible  that  some  change  of  circumstances  may 
occur  which  makes  it  desirable  to  terminate  a  contract,  or  some 
dispute  may  arise  in  respect  thereof.  Even  this  brief  examination 
of  contract  law  would  therefore  not  be  complete  unless  we  gave 
some  consideration  to  the  methods  of  terminating  a  contract,  and 
the  cancellation  of  the  rights  and  liabilities  thereunder,  either  with 
or  without  the  consent  of  all  the  parties  thereto. 

In  practically  every  contract,  executory  in  form,  a  date  is  fixed 
for  its  expiration.  At  such  time  all  rights  and  liabilities  under  the 
contract  cease,  unless  the  agreement  be  further  extended  by  mu- 
tual consent,  or  displaced  by  a  new  one.  It  is  hardly  necessary 
to  say  that  a  contract  is  terminated  when  fully  performed,  and 
may  also  be  terminated  prior  to  the  time  fixed  for  its  expiration, 
by  the  joint  consent  of  the  parties  thereto.  If,  therefore,  it  be- 
comes apparent  after  making  the  contract,  that  it  is  mutually  unsat- 
isfactory, it  may  be  so  abrogated.  No  trouble  will  be  experienced 
if  the  parties  are  in  accord.  A  contract  which  has  been  made  in 
writing  should  be  cancelled  with  as  much  formality  as  was  evi- 
denced in  the  original  agreement,  and  the  parties  thereto  should 
make  certain  that  they  receive  proper  releases  of  all  liability  there- 
under. In  the  same  manner  that  a  contract  may  be  cancelled,  it 
may  be  modified  or  amended  by  mutual  consent. 

Termination  by  Legal  Means. 

Serious  difficulty  arises,  however,  in  respect  of  the  alteration 
of  agreements  or  their  cancellation  when  consent  cannot  be  ob- 
tained. 

Notwithstanding  all  the  precautions  which  we  may  take,  it 
sometimes  occurs  that  a  party  to  the  contract  feels  that  he  has 
been  misled  in  entering  into  a  contract ;  that  he  has  not  been  fairly 
treated ;  that  the  contract,  as  drawn,  does  not  represent  the  real 
intention  of  the  parties,  or  that  there  has  been  some  mutual  mis- 
take of  fact  made  by  the  parties,  which  renders  the  contract  un- 
profitable. In  a  still  greater  number  of  cases  there  is  a  violation 
of  the  terms  of  a  contract  for  which  redress  must  be  sought. 


Lecture  Notes. 


37 


These  questions  are  all  interesting  and  will  repay  some  considera- 
tion. 

As  we  have  seen  in  certain  cases,  a  party  to  a  contract  may 
rescind  the  entire  contract  and  be  relieved  from  further  liability 
thereunder,  even  against  the  will  of  the  other  party  to  the  agree- 
ment. The  chief  examples  of  this,  some  of  which  have  been  con- 
sidered in  connection  with  the  subject  of  the  essentials  to  a  con- 
tract, are  as  follows : 

1.  Where  it  appears  that  there  is  no  consideration  for  the 

contract. 

2.  Where  the  contract  has  been  induced  by  fraud. 

3.  Where  the  contract  is  impossible  of  performance. 

4.  Where  there  has  been  a  mutual  mistake  of  fact  in  re- 
gard to  the  subject  matter  of  the  agreement. 

1.  We  have  previously  spoken  somewhat  at  length  of  the  ne- 
cessity for  a  valid  consideration  in  the  contract.  If  it  shall  be 
found  after  the  contract  has  been  made,  that  no  real  considera- 
tion exists,  the  contract  is  unenforceable.  Many  examples  of  this 
will  suggest  themselves,  for  example :  A  might  agree  to  perform 
some  act  for  B  in  consideration  of  the  latter's  agreement  not  to 
compete  with  A  in  business  in  a  certain  locaUty.  A  might  sub- 
sequently discover  that  B  was  already  under  agreement  to  avoid 
that  territory,  so  that  in  fact  B  had  given  nothing  which  he 
was  not  already  under  obligation  to  perform.  There  being  no 
consideration  for  A's  agreement  with  B,  he  would  be  entirely  jus- 
tified in  refusing  to  perform  his  part  of  the  contract. 

2.  By  far  the  most  important  ground  for  abandoning  or  re- 
scinding a  contract  is  that  fraud  has  been  present  in  its  incep- 
tion. If  it  be  found,  therefore,  after  making  a  contract,  that  a 
party  has  been  wilfully  misled  with  intent  to  cause  him  to  enter 
into  a  contract  which  he  would  not  otherwise  have  made,  he  may 
cancel  the  entire  agreement.  It  is  difficult  to  prove  the  fraud 
which  must  necessarily  be  present  in  order  to  impair  a  con- 
tract. The  essential  facts  which  must  be  established  are  as  fol- 
lows :  It  must  first  be  shown  that  false  representations  were  made 
by  the  individual  with  whom  the  contract  was  made;  that  these 
representations  were   accepted   and  led  to  the   making   of   the 


«iMMmM 


I 


38 


Business  Engineering. 


contract;  they  must  have  been  made  about  a  material  fact  and 
for  the  purpose  of  promoting  the  agreement.  Most  important 
of  all,  the  individual  making  the  fraudulent  representations  must 
be  shown  to  have  known  that  they  were  false.  This  latter  re- 
quirement is  the  most  difficult  to  meet. 

One  who  would  rescind  a  contract  upon  the  ground  of  fraud 
must  return  any  benefits  received  under  it.  He  must  place  the 
other  party  to  the  contract  in  the  same  position  which  he  occu- 
pied when  the  contract  was  made.  If,  therefore,  he  has  placed 
himself  in  such  a  position  that  he  cannot  do  this,  his  right  to  re- 
scind the  contract  is  destroyed.  The  law  will  not  permit  a  man 
to  receive  wholly  or  in  part  the  benefits  of  the  contract  and  es- 
cape the  liability  of  performing  his  duty  thereunder. 

3.  One  may  be  relieved  from  a  contract  which  is  impossible 
of  performance  either  at  the  time  the  contract  is  made,  or  by 
the  happening  of  some  subsequent  event,  provided  it  was  not 
known  at  the  time  the  contract  was  made  that  such  impossi- 
bility existed.  Otherwise,  he  may  be  held  liable  in  damages 
for  his  failure  to  perform.  Where,  however,  a  contract  is  en- 
tered into  innocently,  the  law  will  not  permit  a  man  to  suffer 
by  reason  of  the  fact  that  performance  is  impossible.  Mere  dif- 
ficulty of  performance,  although  it  may  be  great,  and  the  loss 
which  he  suffered  heavy,  will  not  excuse  performance,  nor  will 
a  temporary  impossibility. 

4.  Rescission  on  the  ground  of  mutual  mistake  of  fact  has 
been  sufficiently  considered  under  a  previous  subject. 

Upon  any  of  the  foregoing  grounds,  the  contract  may  either 
be  said  to  be  void,  or  may  be  rescinded. 

Reformation. 

It  sometimes  happens,  however,  that  the  maker  of  a  contract 
does  not  desire  to  go  to  the  extent  of  rescission.  Perhaps  he 
feels  that  the  contract,  as  drawn,  does  not  accurately  express  the 
real  intent  had  at  the  time  it  was  made.  In  this  event  the  aid  of 
the  court  may  be  invoked  to  re-form  the  contract  so  that  it  shall 
accurately  present  the  intent  of  the  parties.  This  is  always  a 
more  or  less  difficult  task,  however,  unless  the  contract  is  clearly 


Lecture  Notes. 


39 


incomplete  or  insufficient.  The  general  policy  of  law  is  that 
a  contract  in  writing  cannot  be  varied  by  parol  evidence.  That 
is,  one  cannot  take  a  contract  complete  in  itself  and  say  that 
something  diflferent  from  what  is  expressed  therein,  was  in- 
tended. There  is  only  one  case  in  which  the  court  will  allow 
this  to  be  done.  If  the  contract  is  ambiguous  or  insufficient  in 
its  phraseology,  so  that  it  cannot  be  determined  from  the  instru- 
ment itself  what  the  real  intention  of  the  parties  was,  the  court 
will  receive  evidence  upon  this  point  and  will  readjust  the  rights 
and  liabiUties  under  the  contract  accordingly.  The  rules  of  con- 
struction will  be  considered  presently. 

Breach  of  Contract. 

We  now  pass  to  the  general  question  of  breaches  of  contract 
and  the  results  which  follow  therefrom.  A  breach  of  contract  oc- 
curs when  one  of  the  parties  thereto  fails  to  perform  a  material 
part  of  the  agreement.  A  failure  in  an  immaterial  or  insignifi- 
cant portion  thereof  is  not  a  breach.  The  breach  of  a  valid 
contract  always  gives  rise  to  an  action  for  damages  sustained 
by  such  breach  and  in  many  cases,  if  it  be  apparent  that  a  breach 
of  contract  is  contemplated,  the  court  will  interfere  and  before 
the  breach  be  committed  will  prevent  it  by  injunction.  These 
two  forms  of  reHef  must  be  clearly  separated  in  mind.  When 
the  damages  which  follow  a  breach  of  contract  may  be  meas- 
ured and  determined  and  the  party  causing  the  breach  is  finan- 
cially able  to  respond  in  damages,  the  only  remedy  is  to  sue  him 
at  law  for  the  amount  of  the  loss  which  is  sustained.  If,  how- 
ever, such  damages  cannot  be  measured  nor  can  any  money 
which  may  be  recovered  recompense  for  the  loss  sustained,  or 
where  the  wrongdoer  is  financially  irresponsible,  an  injunction 
will  lie  to  prevent  the  threatened  injury.  A  few  examples  will 
illustrate  this  statement. 

If  A  agrees  to  employ  B  at  a  fixed  salary  and  refuses  to  do 
so,  while  B  is  ready  and  willing  to  perform  his  contract, it  is  clear 
that  the  damages  which  B  sustains  arise  from  the  loss  of  his  re- 
muneration. Ordinarily,  no  action  can  lie  against  A  save  to 
recover  the  amount  of  the  agreed  compensation.     Let  us  sup- 


40 


Business  Engineering. 


'ti 


pose,  however,  that  A  has  agreed  not  to  cut  down  a  large  tree 
standing  upon  his  property  which  gives  shade  to  B's  house.  It 
is  clear  that  if  A  does  so,  the  damage  cannot  be  repaired.  If 
B  sees  A  about  to  commit  the  violation,  he  may  stop  it  by  in- 
junction. Again,  A  may  have  agreed  with  B  to  permit  him  to 
use  his  laboratory  for  scientific  experiments.  B  cannot  obtain  the 
same  accommodations  or  facilities  elsewhere.  His  damage  will 
be  irreparable  if  A  does  not  fulfill  his  contract.  B  may  there- 
fore restrain  A  from  removing  his  laboratory  and  force  him  to 
permit  the  use  of  it.  Again,  suppose  that  A  has  agreed  not 
to  practice  his  profession  in  the  same  town  with  B,  and  proceeds 
to  do  so.  It  is  clear  that  the  damage  sustained  cannot  be 
measured  in  money  and  the  court  will  grant  an  injunction  to 
prevent  the  threatened  act.  Lastly,  suppose  that  A  has  agreed 
to  give  B  an  exclusive  license  to  sell  a  patented  article  in  a 
certain  city,  and  B  finds  that  A  is  encroaching  upon  such  terri- 
tory while  it  appears  that  A  is  financially  irresponsible.  It  is 
evident  that  although  it  may  be  possible  to  determine  just  how 
much  has  been  lost  through  sales  which  A  makes,  which  amount 
could  ordinarily  be  recovered  in  an  action  at  law,  the  fact  that  A 
is  financially  irresponsible  will  prevent  such  relief  from  being 
efficacious.  A  may  be  judgment  proof.  In  this  case  the  law 
will  grant  an  injunction  to  prevent  the  unlawful  act. 

This  power  to  go  beyond  the  mere  question  of  damages  and  to 
restrain  by  injunction,  is  called  the  equity  power  of  the  court.  It  is 
very  jealousy  exercised  and  may  be  only  invoked  where  the  ordi- 
nary remedies  are  unavailing.  Nor  can  a  man  ever  invoke  the  as- 
sistance of  a  court  of  equity,  unless  he  is  himself  free  from  all 
blame  in  the  premises.  There  are  two  maxims  of  equity  which 
may  be  remembered  with  profit :  "He  who  seeks  equity  must  do 
equity"  and  "He  who  enters  a  court  of  equity  must  come  with 
clean  hands."  Be  the  complaint  never  so  meritorious  or  the 
case  sound  at  law,  help  will  be  refused  unless  the  complainant 
can  show  that  he  is  himself  free  from  blame. 

It  must  be  remembered  also  that  whether  suit  be  brought  at 
law  or  in  equity  the  complainant  must  always  show  a  readiness 
upon  his  part  to  perform  his  obligations  under  the  contract. 


Lecture  Notes. 


41 


There  are  some  exceptions  to  this  rule,  but  they  so  rarely  occur 
and  are  of  such  a  technical  nature  that  we  need  not  consider 
them.  Benefits  under  a  contract  can  never  be  claimed  unless 
obligations  be  performed. 

In  some  cases  it  may  be  that  performance  of  a  contract  is 
prevented  by  the  other  party  thereto,  or  that  by  his  act  perform- 
ance of  the  contract  has  been  rendered  impossible.  In  any  case 
one  must  be  ready  to  perform  if  he  would  enforce  his  rights. 

Thus,  if  one  contracts  to  work  for  another,  and  employment 
is  refused,  the  remedy  is  for  the  amount  of  the  agreed  wages  or 
salary.  But  this  amount  cannot  be  recovered,  should  it  appear 
that,  upon  the  refusal  to  employ,  the  employee  entered  the  service 
of  someone  else.  In  other  words,  he  cannot  receive  double  pay. 
If  he  recover  his  agreed  wage  he  must  deduct  the  amount  re- 
ceived during  the  time  for  what  the  employer  is  held  liable. 

Construction. 

We  now  pass  to  the  last  of  the  important  considerations  in 
regard  to  contracts,  namely,  the  rules  for  the  construction  of 
such  instruments. 

The  methods  by  which  contracts  are  construed  by  the  courts 
is  a  matter  so  closely  within  the  sole  knowledge  of  practicing  law- 
yers that  the  layman  it  not  qualified  to  pass  an  opinion  upon  it. 
Two  or  three  examples  will  suffice  to  explain  this.  When  two 
persons  enter  into  a  contract  they  have  in  mind  not  only  the  terms 
of  the  particular  instrument,  but  as  well,  a  large  fund  of  knowl- 
edge personal  to  themselves,  which  they  read  into  the  paper  and 
perhaps  feel  may  safely  be  omitted  from  its  phraseology.  Some 
facts  they  may  deem  to  be  so  well  known,  both  to  themselves  and 
to  the  other  parties  to  the  contract,  that  to  express  them  would  be 
surplusage.  When,  however,  the  contract  is  taken  before  a  court 
of  justice  for  interpretation,  it  may  be  found  that  the  other  par- 
ties to  the  contract  have  conveniently  forgotten  these  facts  and 
deny  their  existence,  and  the  point  at  issue  may  be  deemed  by  the 
court  controlling.  This  is  the  situation  which  occurs  in  practic- 
ally every  contest  over  a  contract.  A  sharp  divergence  of  opinion 
is  found  as  to  what  was  really  meant  at  the  time  of  execution. 


^ 


42 


Business  Engineering. 


It  is  well,  therefore,  to  make  certain,  before  signing  a  con- 
tract, that  its  phraseology  is  so  clear,  its  terms  so  explicit  and  its 
contents  so  full  that  it  may  be  submitted  to  any  court,  before 
which  it  may  be  brought,  containing  in  the  body  of  the  instru- 
ment itself,  all  the  facts  which  are  necessary  to  support  the  de- 
sired view  of  it. 

It  must  also  be  remembered  that  many  expressions  common- 
ly used  in  contracts  have  a  widely  different  significance  in  a  court 
of  law  from  their  popular  meaning.    Furthermore,  it  is  frequently 
the  experience  of  litigants  that  they  find  obligations  imposed  upon 
them  by  the  terms  of  their  contracts,  and  which  are  implied  from 
provisions  stated  therein,  which  were  never  in  contemplation  at 
the  time  the  instrument  was  made.     It  is  a  lawyer's  business  to 
pass  upon  all  these  points.     If  an  attorney  be  wise,  he  will  neither 
draw  nor  pass  upon  a  contract  until  he  has  first  satisfied  himself 
of  the  surrounding  circumstances,  and  in  many  cases  of  the  details 
of  his  client's  business,  in  order  that  he  may  judge  whether  suffi- 
cient is  expressed  in  the  contract  to  guarantee  its  enforcement  in 
a  court  of  justice.     Points  which  may  seem  insignificant  to  the 
client  may  seem  important  to  him,  and  so  prove  if  the  contract 
be  under  fire.     No  one,  therefore,  should  lose  patience  with  an 
attorney  if  he  seem  to  ask  questions  which  the  client  may  deem 
irrelevant  and  superfluous.   It  is  a  sign  that  he  is  in  good  hands. 
It  is  much  better  that  the  attorney  should  know  too  much  than 
too  little.     No  attorney  should  ever  be  employed  who  cannot  be 
trusted  with  the  minutest  details  of  a  profession  or  work. 

Many  disputes  arise  from  the  fact  that  the  parties  to  a  contract 
are  mistaken  in  their  ideas  of  their  obligations  thereunder.  With- 
out advice  they  assume  to  act  in  a  manner  which  they  deem  justi- 
fied by  their  contracts,  and  which  in  fact  is  in  violation  thereof. 
At  times  a  failure  to  comprehend  the  true  meaning  of  a  contract 
may  be  excused  upon  the  ground  of  the  inherent  difficulty  of  the 
case.  More  often,  however,  a  few  moments'  careful  consideration 
of  the  contract,  prior  to  action,  and  even  a  slight  knowledge  of  the 
rules  by  which  such  instruments  are  construed,  would  have  pre- 
vented the  violation.  If,  therefore,  after  making  the  contract  the 
question  arises  whether  a  certain  proposed  course  of  action  will 


Lecture  Notes. 


43 


be  in  accordance  with  the  contract  or  in  violation  of  its  terms,  the 
instrument  must  be  considered,  not  in  the  light  of  personal  wishes 
or  even  of  individual  opinion.  If  a  dispute  arises  between  the 
parties  to  the  contract  it  will  not  be  settled  by  any  such  authority 
as  this.  The  court  will  adjust  the  differences  between  the  parties 
and  construe  the  contract  in  accordance  with  well  established 
rules.  An  attempt  must  be  made  to  regard  the  contract  as  the 
court  will  regard  it.  It  is  desired  to  give  a  few  practical  sugges- 
tions upon  this  subject. 

In  the  first  place,  when  a  contract  comes  before  the  court  for 
interpretation,  examination  will  be  first  made  of  the  instrument 
itself,  for  so  far  as  the  agreement  is  clear  and  unambiguous  the 
court  will  give  to  it  full  force  and  effect,  nor  will  it  allow  any 
explanation  to  vary  or  alter  the  explicit  statements  made  therein. 
This  is  obviously  upon  the  theory  that  the  parties  were  presumed 
to  know  what  they  did  at  the  time  they  entered  into  the  agree- 
ment, and  when  their  intention  is  clearly  indicated  it  must  pre- 
vail however  burdensome  or  disagreeable.  Thus  far  the  inter- 
pretation is  comparatively  free  from  difficulty.  It  frequently 
happens,  however,  that  while  the  question  in  dispute  is  partially 
covered  by  the  terms  of  the  contract,  the  phraseology  of  the  in- 
strument is  susceptible  of  two  or  more  interpretations.  It  is  then 
the  province  of  the  court  to  determine  what  was  really  meant  by 
the  language  employed.  There  are  a  number  of  broad  rules  to 
guide  the  court. 

1.  The  words  will  be  given  their  ordinary  and  commonly 
accepted  meaning,  unless  it  appear  from  the  circumstances  of  the 
case  that  they  were  used  in  a  special  sense. 

2.  Where  the  subject  matter  of  the  contract  concerns  a  par- 
ticular trade  or  business,  words  having  reference  thereto  will  be 
given  the  meaning  usually  ascribed  to  them  in  such  business  or 

profession. 

3.  The  court  will  take  cognizance  of  particular  uses  or  cus- 
toms aflFecting  the  subject  matter  of  the  contract. 

4.  The  court  will  endeavor  to  ascertain  from  any  possible 
source  what  the  real  intent  of  the  parties  was,  and  give  force  and 
effect  to  that  intention. 


44 


Business  Engineering. 


This  last  rule  is  the  most  important  of  the  four,  and  com- 
prises in  a  measure  the  other  three.  If  the  court  can  once  deter- 
mine what  the  parties  really  meant  it  will  conform  the  contract 
thereto,  no  matter  what  the  actual  phraseology  may  be.  The  first 
three  are  in  reality  aids  to  arriving  at  the  last. 

It  frequently  happens  that  the  subject  in  dispute  is  omitted 
entirely  from  the  contract,  and  the  court  is  then  remitted  to  the 
necessity  of  determining  what  is  fair  and  equitable,  having  in 
mind  the  whole  contract  and  the  circumstances  surrounding  it. 
In  other  words  the  court  will  say  that  if  the  question  had  come 
up  at  the  time  of  making  the  contract,  it  would  have  been  disposed 
of  by  the  parties  in  general  conformity  with  the  rest  of  the  agree- 
ment. 

It  is  hardly  necessary  to  say  that  it  must  appear  that  the  mat- 
ters omitted  from  the  contract  should  have  been  included  therein 
in  order  to  justify  the  court  in  interfering.  By  that  is  meant  that 
it  must  be  so  inseparably  connected  with  the  contract  and  so 
bound  up  in  it  that  it  may  justly  be  claimed  that  it  is  implied  in 
the  instrument  itself.  Mention  has  been  previously  made  of  the 
fact  that  it  frequently  happens,  in  making  a  contract  unadvisedly, 
that  the  parties  find  obligations  imposed  upon  them  by  implication 
which  they  did  not  consider  at  the  time  the  agreement  was  made. 
In  passing  upon  such  points  as  this  the  court  applies  much  the 
same  rules  as  in  cases  of  ambiguity.  In  the  last  analysis  they  are 
determined  by  the  intent  of  the  parties  and  the  principles  of  fair- 
ness and  equity.  If,  therefore,  a  doubt  arise  as  to  obligations  or 
rights  under  a  contract,  and  the  point  in  question  is  not  found  to 
be  clearly  stated  in  the  instrument,  the  best  test  which  can  be 
applied,  in  order  to  determine  action  thereunder,  will  be  to  at- 
tempt to  take  the  position  and  viewpoint  of  the  other  party  to 
the  contract.  It  should  be  considered  whether  from  his  stand- 
point the  course  of  action  which  is  proposed  would  be  fair  and 
equitable,  and  in  accordance  with  the  general  intent,  as  disclosed 
from  the  whole  contract.  Let  the  question  be  asked  whether, 
if  the  positions  were  reversed,  such  action  would  be  permitted. 
If  this  be  done  honestly,  both  sides  of  the  question  will  be  argued 
with  equal  vigor,  and  an  attempt  will  be  made  to  arrive  at  a  deci- 


Lecture  Notes. 


45 


sion  which  is  in  accordance  with  what  is  fair  and  just.  If  the 
contract  be  called  before  a  court  of  law  and  an  attempt  made  to 
justify  a  given  action,  the  course  pursued  will  be  determined  by 
these  principles,  and  their  dictates  might  as  well  be  observed  be- 
fore as  after.    Incidentally  much  trouble  will  be  saved. 

It  is  a  difficult  thing  to  take  an  unprejudiced  view  of  facts 
in  the  face  of  personal  interests,  but  the  attempt  to  do  so  should 
be  made,  if  not  from  higher  motives,  because  it  is  certain  that  in 
the  long  run  it  is  more  profitable  to  do  so.  Above  all,  one  should 
not  be  carried  away  with  the  idea  that  because  a  contract  may 
seem  without  flaw  or  defect  it  will  prove  sufficiently  strong  to 
justify  an  act  v.hich  is  not  in  accordance  with  these  principles 
or  which  will  make  it  possible  to  obtain  an  undue  advantage  over 
an  associate. 

Conclusion. 

Such  are  the  salient  principles  of  the  law  of  contracts.  There 
remain  only  one  or  two  observations,  which  are  in  the  nature  of 
general  advice. 

Above  all  avoid,  if  it  be  a  possible  thing,  litigation  over  con- 
tracts. It  is  better  to  surrender  at  times  very  substantial  advan- 
tages rather  than  to  undergo  the  dangers  and  difficulties  of  a  law- 
suit. Though  one  may  win  eventually,  it  too  often  occurs  that, 
despite  the  best  efforts  of  the  most  competent  attorneys,  the  ulti- 
mate victory  will  be  fruitless.  Litigants  are  involved  in  heavy 
expense  and  tedious  delay.  Their  business  may,  meantime,  be  at 
a  standstill,  and  they  may,  while  in  pursuit  of  fancied  gain,  lose 
very  substantial  present  advantages.  Like  every  other  business 
question,  when  one  is  faced  with  Htigation  he  must  weigh  whether 
the  advantages  which  he  will  gain  outweigh  the  certain  disadvan- 
tages which  he  incurs. 

Unfortunately,  there  are  too  many  cases  where  litigation  can- 
not be  avoided  in  justice  to  one's  own  rights,  and  with  proper 
regard  for  one's  own  interests.  The  number  should  not  be  in- 
creased unnecessarily.  He  who  is  forced,  however,  into  litigation, 
should  make  up  his  mind  to  pursue  it  until  he  has  either  obtained 


46 


Business  Engineering. 


his  rights  or  a  final  decision  of  the  highest  court  is  rendered 
against  him. 

The  writer  has  endeavored  in  presenting  this  subject  to  give 
only  general  principles,  and  to  avoid  embarrassment  by  technical 
details  or  a  discussion  of  the  more  complicated  points.  In  some 
instances  principles  which  have  been  explained  are  subject  to 
minor  exceptions.  As  it  is  especially  desired  to  make  these  notes 
of  practical  benefit,  it  will  be  found  that  at  times  the  writer  has 
not  been  content  to  simply  state  the  law,  but  has  made  sugges- 
tions as  to  its  application  in  everyday  affairs.  Technical  accuracy 
has  not  been  sought  so  much  as  a  simple  exposition  of  general 
principles,  which  at  best  are  sometimes  puzzling  to  the  lay  mind. 

The  most  satisfactory  result  which  could  follow  the  pub- 
lication of  the  foregoing  pages  would  be  to  provoke  the  com- 
ment that  they  set  forth  nothing  more  than  principles  of  ordinary 
right  conduct  and  common  sense.  Of  these  the  law  should,  and 
aims  to  be,  the  exponent. 

It  is  obvious  that  the  principles  of  the  law,  however  well 
fixed,  must  be  applied  to  such  a  wide  variety  of  cases  that  they 
appear  to  assume  different  forms.  It  sometimes  seems  to  the 
layman  that  distinctions  made  by  courts  and  lawyers  are  more 
fancied  than  real,  and  at  times  the  application  of  legal  principles 
seems  in  individual  cases  to  work  hardship.  It  is  only  a  super- 
ficial observer  who  joins  the  ranks  of  those  who  would  complain 
of  the  technicalities  of  law  or  the  difficulties  and  delays  in  its  ad- 
ministration. The  science  of  law  is  founded  upon  theories  and 
teachings  which  are  above  and  beyond  any  individual  case.  In 
the  last  analysis,  the  law  is  based  upon  ideas  of  fairness  and  justice 
which  have  been  in  process  of  development  from  the  time  when 
the  Mosaic  law  was  declared.  If  one  could  be  absolutely  certain 
that  he  could  determine  in  any  given  case  that  which  was  abso- 
lutely fair,  honest,  straightforward  and  equitable,  and  in  accord- 
ance with  the  greatest  public  good,  he  could  be  perfectly  sure 
that  ultimately  his  view  and  actions  based  thereon  would  be  sus- 
tained by  the  courts  of  last  resort. 

The  greatest  lawyers  have  been  those  whose  first  thought  in 
any  case  brought  before  them  was  always,  "What  ought  the  law 


Lecture  Notes. 


47 


to  be?"  It  is  said  that  Daniel  Webster  before  he  would  accept  a 
retainer  always  considered,  not  whether  he  could  successfully 
urge  the  contention  of  his  clients  but  whether  such  contention 
ought  to  be  sustained.  If  he  could  answer  this  question  in  the 
affirmative,  he  accepted  the  case ;  if  not,  he  refused  it.  Almost  all 
litigation  in  the  last  analysis  arises  out  of  an  attempt  by  one  or 
more  of  the  parties  concerned  to  act  in  defiance  of  the  abstract 
principles  of  justice  referred  to.  If,  therefore,  a  man  desires  to 
be  successful  in  his  relations  with  those  about  him,  which  is  only 
a  broader  definition  of  contracts,  he  should  be  certain  that  he  so 
rules  himself  that  he  not  only  serves  his  own  interests  but  that 
he  respects  the  rights  of  those  about  him.  It  is  a  mistaken  im- 
pression prevalent  in  the  minds  of  many  that  the  only  duties  which 
are  owed  to  our  neighbors  are  those  which  are  enjoined  by  printed 

statutes. 

Before  the  statutes  were  ever  conceived  the  principles  which 
they  set  forth  were  found  in  the  moral  law,  which  contained  and 
contains  not  only  those  matters  which  have  become  the  subject  of 
legislative  enactment,  but  also  those  ideals  of  duty  and  upright- 
ness which  cannot  be  set  forth  by  written  words,  and  which  speak 
most  loudly  and  with  a  most  conclusive  force  in  the  individual 
conscience.  To  think  that  these  latter  may  be  ignored  with  im- 
punity is  a  false  idea.  Sooner  or  later  in  the  aflFairs  of  business, 
men  will  be  called  upon  to  square  their  actions  with  these  precepts. 
If  they  are  unable  to  do  so  the  chance  of  ultimate  success  is  small ; 
but  conscious  that  he  has  acted  in  accordance  with  their  teach- 
ing a  man  need  not  fear  to  submit  the  contracts  and  agreements 
of  daily  life  to  the  judgment  of  any  tribunal. 


}■ 


GENERAL  NOTES. 

October,  1904. 

In  each  of  my  classes,  I  have  found  that  certain  of  the  men 
had  already  received  some  instruction,  more  or  less  complete,  in 
bookkeeping.  I  am  always  glad  to  find  that  there  are  some  of 
our  students  who  have  been  thus  benefited;  but  let  me  say  to 
them  that  they  can  still  well  afford  to  give  close  attention  to 
these  lectures.  They  can  get  more  from  them  than  can  those 
who  have  previously  had  no  instruction  in  this  line;  for  they  are 
better  prepared  to  digest  the  matters  placed  before  them  and 
they  should  be  more  keen  in  their  appreciation  of  the  value  of 
such  instruction.  Their  minds  have  been  prepared  for  this  line 
of  instruction,  and  this  is  a  point,  the  importance  of  which  will 
be  appreciated  more  and  more  as  knowledge  is  gained  in  the 
school  of  experience.  The  value  to  the  individual  of  advanced 
instruction  depends  upon  how  completely  the  mind  has  been 
prepared  therefor  by  previous  elementary  instruction  and  ex- 
perience. 

But  apart  from  all  of  this,  you  will  find  that  I  am  covering 
in  these  lectures  much  that  is  outside  of  bookkeeping,  and  much 
which  the  bookkeeper  and  even  the  accountant  would  not  be 
competent,  through  lack  of  special  training,  to  give  you.  As  a 
warning,  I  may  say  that  in  my  previous  classes  I  have  found 
that  sometimes  the  men  who  had  received  instruction  in  book- 
keeping before  coming  to  the  Institute  made  a  poorer  showing 
in  the  examinations  than  those  who  had  not  had  this  previous 
advantage.  Probably  this  was  because  they  thought  that  they 
were  so  fully  informed  that  it  was  not  necessary  for  them  to 
make  any  effort  to  follow  the  subject  with  me.  Perhaps  it  is 
already  apparent  to  many  of  you  that  much  that  is  of  value  in 
my  lectures  comes  out  incidentally  through  the  informal  state- 
ments of  my  own  experiences  by  way  of  illustration. 

What  you  are  looking  for,  we  can  assume,  is  real  success  in 
your  chosen  profession.     Then  certainly  it  will  be  of  assistance 


Lecture  Notes. 


49 


to  you  if  you  can  draw  upon  the  experiences  of  one  who  proba- 
bly has  had  to  meet  nearly  all  the  difficulties  that  you  have  had 
and  will  have  to  meet,  and  perhaps  some  in  addition,  and  is 
anxious  to  give  you  as  far  as  possible  the  opportunity  to  avoid 
his  errors. 

You  should  be  interested  to  know  what  an  employer  is  look- 
ing for  in  the  employe.  I  can  give  you,  in  advance  of  your 
graduation,  information  in  this  direction;  and  I  can  give  it  to 
you  because  I  was,  for  many  years,  a  salaried  employe  and  for 
many  more  years  a  salaried  employe  while  also  a  large  employer 
of  engineer-assistants,  and  still  later,  an  independent  employer 
of  technical  graduates.  While,  of  course,  employers  are  gov- 
erned by  varying  ideas  in  making  their  selections,  I  can  state  to 
you  what  I  have  been  in  the  habit  of  looking  for;  and  I  am 
inclined  to  think  that  today,  in  connection  with  the  keen  com- 
petition which  is  now  a  feature  in  nearly  all  lines  of  industrial 
work  in  this  country,  many  employers  are  guided  by  the  same 
views. 

I  would  select,  first,  for  honesty,  then  for  thoroughness 
and  then  for  energy  and  earnestness.  First  of  all,  I  do  not  want 
any  man  in  my  employ  unless  he  is  honest  in  his  intention  to 
work  wholly  in  my  interests.  Secondly,  I  do  not  want  him 
unless  he  will  do  the  work  assigned  to  him  thoroughly,  even  if 
the  quantity  of  work  is  not  large.  Lastly,  if  I  can  get  a  man 
who  is  honest  and  thorough,  and  also  is  endowed  with  energy 
and  earnestness,  in  other  words,  has  a  large  capacity  for  work, 
I  know  then  that  I  have  a  man  who  will  meet  all  reasonable 
requirements.  Many  young  fellows,  and  Stevens  Institute  men 
amo^g  the  number,  soon  give  up  the  employment  which  they 
first  secure  after  graduation  because,  as  they  have  often  ex- 
pressed it  to  me,  they  saw  no  chance  ahead;  whereas  the  facts 
are  that  they  have  not  yet  secured  a  thorough  command  of  the 
minor  details  to  which  they  had  been  assigned.  The  young 
graduate  should  be  very  slow  to  turn  away  from  work  to  which 
he  is  assigned  because  he  sees  no  advantage  to  himself  in  doing 
that  work  thoroughly.  To  him,  the  work  seems  unimportant, 
but  on  this  point  he  is  not  yet  competent  to  judge.     It  may  be 


i 


50 


Business  Engineering. 


I 


that  his  employer  is  primarily  or  incidentally  testing  him  as  to 
thoroughness;  is  testing  him  with  what  appears  to  be  work  of 
little  responsibility.  The  man  who  performs  any  duty,  no  mat- 
ter how  humble,  anything  less  than  thoroughly  has  no  right  to 
expect  promotion.  The  employer  who  would  promote  such  an 
employe  does  not  deserve  loyal  service. 

1  told  last  year's  class  of  a  case  which,  at  that  time,  had  just 
been  called  to  my  attention.     Three  young  graduates  were  em- 
ployed by  a  certain  industrial  concern  and  put  to  work  at  all  sorts 
of  rough  detail  work.    They  were  well  paid.    One  man  resigned 
in  a  month  or  two  because  he  said  it  was  not  work  suited  to  the 
capacity  of  a  man  who  had  received  a  technical  education ;  the 
second  man  stuck  to  it  for  a  year  or  so,  grumbling  much  of  the 
time;  the  third  man   went  ahead   uncomplainingly,  performing 
thoroughly  and  promptly  every  task  to  which  he  was  assigned. 
This  third  man  was  transferred  from  one  rough  job  to  another  for 
three  years.    Then  the  manager  sent  for  him,  reminded  him  that 
his  two  companions  had  left,  one  after  a  very  few  months,  the 
other  after  twelve  months.     He  then  asked  this  third  man  what 
had  led  him  to  go  on  with  the  work  assigned  to  him.    The  young 
man  replied  something  to  the  eflfect  that  he  was  perfectly  satisfied 
with  the  fact  that  he  was  day  by  day  gaining  experience,  day  by 
day  he  found  there  was  something  to  learn,  and  that  he  was  confi- 
dent from  what  he  saw  of  the  management  that  there  would  be  a 
place  for  him,  if  he  could  prove  that  he  was  competent  to  fill  some 
one  of  the  more  important  positions.  The  manager  then  told  him 
that  his  services  were  satisfactory,  that  he  would  now  be  pushed 
forward  to  higher  positions,  and  at  the  end  of  two  more  years  he 
would  be  placed  in  a  position  of  authority  and  responsibility  if  he 
continued  as  he  had  begun.     The  result  was  at  the  end  of  five 
years  this  young  man  was  drawing  a  salary  of  $5,000  a  year,  this 
salary  being  warranted  by  the  fact  that  he  was  competent  and  in 
sympathy  with  the  Company's  scheme  of  management. 

There  are  some  who  are  perfectly  willing  to  do  the  work  as- 
signed to  them  and  do  it  thoroughly,  but  who  do  not  go  beyond 
this  and  seek  for  opportunities  to  take  on  additional  work  or  to 
further  cultivate  their  powers  in  the  school  of  experience.    These 


Lecture  Notes. 


\ 


51 


men,  lacking  in  ambition,  initiative,  or  in  robustness  of  mind  or 
body  or  both,  will  probably  continue  to  fill  minor  positions.  But 
their  lives  are  successful  as  compared  with  the  lives  of  those  who 
have  the  desire  and  push  to  go  higher  but  are  not  willing  to 
perform  the  necessary  preliminary  drudgery. 

I  am  continually  brought  in  contact  with  men  who  attempt  to 
justify  their  incapacity  by  claiming  that  they  are  men  of  breadth; 
that  they  employ  narrow  men  to  do  their  detail  work.  The  facts, 
probably,  are  that  they  have  no  real  capacity  except  to  steal  the 
product  of  other  men's  brains. 

Do  not  misunderstand  me.  I  am  not  advising  you  to  be 
narrow  men  as  opposed  to  broad  men.  Add  breadth  to  your 
make  up  as  far  and  as  fast  as  you  can.  The  men  who  do  each 
piece  of  work  thoroughly  and  then  try  to  learn  how  to  do  some- 
thing else  just  as  thoroughly  mill  gain  in  breadth.  The  narrow 
man  is  the  man  who  is  satisfied  with  the  thorough  performance 
of  one  narrow  line  of  work. 

There  are  many  men  of  breadth  who  do  employ  men  to  do 
special  work  for  them,  work  which  perhaps  their  employers 
could  not  do  as  well  for  themselves ;  but,  almost  without  excep- 
tion, these  men  are  masters  of  detail  in  some  lines  and  so  govern 
themselves  by  an  appreciation  of  the  necessity  for  accuracy  and 
completeness  of  detail  in  all  lines. 

I  have  more  than  once  had  Napoleon  quoted  to  me  as  the 
personification  of  breadth ;  I  then  quote  him  back  as  the  master 
of  detail,  not  only  of  one  department  in  army  management,  but  of 
every  department.  He  knew  what  could  be  accomplished  and  the 
best  means  to  adopt  therefor. 

The  fact  that  there  are  superficial  men  who  flatter  themselves 
that  they  are  broad,  and  who  succeed  in  making  money  through 
reckless  push,  should  not  encourage  us  to  believe  that  it  is  not 
desirable  for  a  conscientious  man  to  pass  through  the  drudgery  of 
the  training  period.  For  one  of  the  former  type  who  succeeds 
there  are  hundreds  who  can  be  found  sliding  more  and  more 
rapidly  down  hill,  perhaps  starting  from  watching  the  ''ticker"  in 
a  broker's  office  and  winding  up  as  the  shabby-genteel  tramp  or 
worse. 


I 


4 

I! 


Si 


C2  Business  Engineering. 

The  privates  in  the  army  of  promoters  are  largely  of  this 
class  and  many  of  those  who  succeed  as  money  makers  do  so  be- 
cause they  are  willing  to  risk  the  money  of  their  friends  and 
dupes.    With  them  it  is  a  case  of  "Tails  I  win,  heads  you  lose. 

Believe  me  when  I  say  that  employers  find  it  quite  as  difficult 
to  secure  competent  employes  as  men  out  of  positions  find  it 
difficult  to  secure  satisfactory  employment.  Intelligent  employers 
are  constantly  on  the  watch  for  their  young  employes  to  betray 
their  inner  selves.  The  youngster  may  be  doing  some  very  sim- 
ple work,  but  if  the  intelligent  employer  sees  that  the  work  is 
being  done  thoroughly  and  with  energy,  the  chances  are  that  a 
mental  note  will  be  made  that  that  fellow  is  capable  of  doing 

something  larger.  ^ 

Young  men  who  want  to  secure  remunerative  employment 
must  be  willing  to  go  where  that  employment  calls  them.  Those 
who  insist  upon  being  located  in  the  vicinity  of  New  York— for 
instance— must  be  willing  to  recognize  that  their  chances  are  ac- 
cordingly reduced. 

One  of  the  great  troubles  with  young  men— and  older  men 
toc^is  that  they  do  not  complete  their  work.  When  they  meet 
with  a  problem  which  they  cannot  at  once  see  how  to  solve  they 
fall  back  on  the  man  above  to  make  good  their  deficiency,  not 
recognizing  that  it  is  their  duty  to  go  ahead  and  do  the  best  they 
can  and  go  as  far  as  they  can  without  assistance.  Let  me  quote 
from  Mr.  Kerr's  admirable  address  to  the  last  graduating  class : 
"This  is  about  the  time  to  show  your  nerve.  Don't  be  dazed  or 
baffled,  but  make  a  start.  Use  your  wits  and  you  will  get  some- 
where, and  if  you  cannot  always  see  the  end  it  will  constantly  get 
nearer  and  plainer   when  you  go  as  far  as  you  can  and  then  see 

how  far  you  can  go.'*  ^ 

A  friend  of  mine  last  summer  had  an  experience  in  this 
direction.  He  was  engaged  in  a  most  important  piece  of  work. 
His  strength  was  greatly  reduced  by  ill  health  and  he  was 
anxious  to  tax  his  strength  as  little  as  possible,  and  therefore 
to  do  little  more  than  direct  the  work  of  others.  But  he  found 
that  his  chief  difficulty  was  to  get  any  one  employe  to  finish 
up  any  one  piece  of  assigned  work.     After  working  four  or  five 


Lecture  Notes. 


53 


months  on  this  case,  he  told  me  that  there  was  only  one  man  of 
the  whole  lot  who  had  completed  any  one  piece  of  work  assigned 
to  him,  and  the  result  was  that  his  health  was  again  broken  down 
by  the  work  entailed  in  making  good  the  deficiencies  of  those 
who  were  paid  to  do  the  work;  and  these  men  were  specialists 
in  the  lines  for  which  they  were  employed.  In  such  surround- 
ings see  how  the  thorough  man  shines  out. 

Let  me  give  you  an  example  from  my  own  experience.  It 
has  to  do  with  a  day  laborer,  but  the  principle  is  exactly  the 
same.  Years  ago  I  had  undertaken  to  push  through  a  piece  of 
outside  work  which  had  to  be  completed  within  a  given  time 
or  the  result  would  be  a  considerable  loss  to  my  company.  My 
directors  were  reluctant  to  have  me  undertake  the  work,  feeling 
certain  that  it  could  not  be  completed  within  the  time  limit.  I 
took  on  a  large  force  and  organized  it  in  squads  for  diflferent 
classes  of  work.  One  part  of  the  work,  and  a  very  important 
one,  was  to  fill  in  the  excavations  as  fast  as  the  work  under  the 
surface  had  been  completed.  After  a  day  or  two,  I  noticed  that 
a  young  Scotchman  only  recently  landed  and  quite  green  at 
the  work,  was  the  only  one  who  could  be  relied  on  absolutely  to 
follow  my  instructions  in  this  class  of  work.  The  work  to  be 
done  was  easy  to  understand;  the  trouble  was  that  there  was 
so  much  drudgery  connected  with  it  that  the  majority  of  the 
men  would  neglect  it  unless  constantly  supervised.  I  soon  found 
that  this  man's  work  was  not  neglected,  whether  I  was  looking 
on  or  whether  I  was  in  some  other  part  of  the  field.  After  a  few 
days,  I  took  him  to  one  side,  told  him  I  was  satisfied  with  his 
work  and  asked  him  if  I  could  rely  on  him  to  boss  a  small  gang, 
if  I  placed  that  department  of  the  work  in  his  hands;  that  I 
would  back  him  up,  but  would  he  be  willing  to  tell  me  of  the 
facts  if  the  men  neglected  their  work  and  if  his  authority  was 
disputed.  He  expressed  confidence  in  his  ability  to  satisfy  me, 
and  I  placed  him  in  charge  as  a  sub-foreman.  The  result  was 
that  that  part  of  the  work  was  done  thoroughly  and  never  gave 
after-trouble.  The  outcome  was  that  this  man,  instead  of  being 
laid  off  as  the  other  laborers  were  at  the  end  of  this  particular 
job,  was  taken  into  the  works  and  given  steady  employment  at 


1 


54 


Business  Engineering. 


an  increase  in  wages  of  33  per  cent.  He  was  then  given  an 
opportunity  to  learn  the  details  inside  the  works  and  secured 
employment  for  life  at  good  wages. 

I  quite  appreciate  that  my  arguments  in  favor  of  thorough- 
ness do  not  appeal  to  the  highest  motives.  But  there  is  nothing 
wrong  in  a  man  trying  to  advance  his  interests  and  it  is  his  duty 
to  make  himself  so  competent  that  he  will  never  be  a  charge 
on  his  friends  or  society.  A  duty  well  performed  from  lower 
motives  frequently  leads  to  the  development  of  higher  motives. 

Recently  I  have  had  drawn  to  my  attention  a  number  of 
times  the  fact  that  young  engineer-students  do  not  really  appre- 
ciate what  their  technical  education  is  doing  for  them.  For 
instance,  in  a  recent  interview  with  a  man  who  graduated  last 
year,  I  was  informed  that  he  had  learned  more  in  three  months, 
running  a  small  plant  and  being  made  responsible  for  the  care 
of  the  plant,  than  he  had  learned  during  the  four  years  at  Stevens 
Institute.  This  is  a  sample  of  many  cases  of  a  like  nature  which 
I  have  had  forced  upon  my  attention.  This  young  man  failed 
to  see  that  it  was  largely  because  of  his  training  at  Stevens  Insti- 
tute that  he  was  able  to  so  quickly  learn  to  run  this  plant.  It 
was  his  training  at  "Stevens"  which  had  qualified  him  to  make 
this  rapid  progress  in  the  school  of  experience.  Without  this 
preliminary  training,  he  might  never  have  been  able  to  learn 
what  he  had  thus  learned  in  three  months. 

This  lack  of  appreciation  for  the  part  which  the  college  train- 
ing plays  in  a  man's  after  life,  and  especially,  his  success,  is  not, 
by'^any  means,  confined  to  the  technical  graduate.  We  frequently 
hear  men  say  that  they  are  unable  to  put  their  fingers  definitely 
upon  anything  for  which  they  can  thank  their  college  training. 
No  doubt  this  is  true,  in  a  measure,  with  many  men  who  neglect 
their  opportunities :  but  the  man  who  is  so  inclined  to  question 
the  value  of  a  college  training  should  bear  in  mind  that  it  is  not 
the  facts  stored  up  which  are  of  so  much  value,  but  it  is  the 
cultivated  capacity  for  straight  thinking  and  reasoning.  The 
technical  graduate  especially  should  have  this  point  in  mind  when 
he  is  inclined,  in  his  pessimistic  moods,  to  feel  that  he  has  wasted 


Lecture  Notes, 


55 


four  years  devoted  to  technical  study.  Even  the  man  who  takes 
up  employment  in  a  branch  of  engineering  which  has  not  been 
specifically  covered  by  his  college  course  will  find  upon  considera- 
tion, if  he  has  any  powers  of  analysis,  that  it  is  the  preliminary 
and  fundamental  training  in  science  and  mathematics  which  has 
qualified  him  to  take  up,  with  confidence  as  to  his  ultimate  suc- 
cess, his  particular  specialty.  And  this  brings  me  to  another  point 
which  is  frequently  urged  against  the  value  of  a  college  training, 
and  very  often  urged  against  the  value  of  a  technical  training. 

You  hear  it  said  that  men  of  high  scholarship  do  not  often 
succeed  in  life.  It  is  true  that  men  who  have  gone  high  in 
scholarship  frequently  are  not  successful  in  practice.  If  so,  this  is 
because  they  have  failed  to  learn  in  the  school  of  experience ;  for, 
as  I  have  said,  you  must  bear  in  mind  that  the  work  in  the  school 
of  engineering  must  be  supplemented  by  equally  conscientious 
work  in  the  school  of  experience.  To  graduate  at  ** Stevens,"  a 
man  must  pass  60  per  cent,  in  every  study.  If  our  60  per  cent, 
men  succeed  in  after  life,  as  compared  with  those  of  a  higher 
grade  of  scholarship,  it  is  that  by  reason  of  their  personal  char- 
acteristics or  their  environment  they  take  better  advantage  of  the 
opportunities  afforded  in  the  school  of  experience,  and  so  they 
secure  in  that  school  such  a  high  per  cent,  that,  averaged  with 
their  low  grade  of  60  per  cent,  in  the  technical  school,  their  gen- 
eral average  is  still  high.  Whereas,  if  the  technical  graduate  who 
has  secured  a  90  per  cent,  average  in  the  school  of  technology  neg- 
lects, through  one  cause  or  another,  to  pursue  his  studies  in  the 
school  of  experience,  fails  even  to  get  a  passing-mark  in  the  school 
of  experience,  his  general  average  will  still  be  low  as  compared 
with  that  of  the  man  who  secured  a  60  per  cent,  grade  in  the 
college  and  a  90  per  cent,  grade  in  the  school  of  experience.  This 
does  not  apply  in  the  same  degree  to  the  men  who  graduate  from 
an  institution  like  Oxford  and  then  continue  to  work  in  some  of 
the  fields  of  higher  scholarship,  if  they  work  at  all.  Naturally, 
then,  the  high  grade  obtained  in  the  college  follows  them  through 
their  work  in  life. 

As  I  am  constantly  trying  to  show  you  men,  the  technical 
education  that  you  get  in  a  school  of  technology  must  be  supple- 


56 


Business  Engineering. 


mented  by  the  training  that  you  will  receive  in  the  school  of  expe- 
rience. The  industrial  manager  of  today  must  be  a  man  who 
has  had  the  opportunity  in  both  schools  and  has  taken  full  ad- 
vantage of  all  his  opportunities.  In  this  connection,  let  me  refer 
to  a  point  which  I  have  had  forced  on  my  attention  a  number  of 
times  since  I  have  been  president  of  the  Institute.  As  you  know, 
we  are  in  the  habit  of  calling  in  engineers  from  outside  to  lecture 
to  our  upper  classes  on  some  special  features  in  engineering  prac- 
tice. We  frequently  call  in  some  of  our  own  graduates.  I  have  lis- 
tened to  a  number  of  these  lectures  given  by  men  who  are  essen- 
tially engineers ;  that  is,  they  are  responsible  more  particularly  for 
the  strictly  engineering  side  of  their  business  than  for  the  com- 
mercial side.  Still  I  have  noticed  and  drawn  to  their  attention, 
and  received  their  acknowledgment  of  the  truth  of  my  observa- 
tions, that  one-half  to  two-thirds  of  each  lecture  is  devoted  to 
the  practical  features  of  their  work,  and  especially  to  the  ques- 
tions of  commercial  limitations  under  which  they  have  been  called 
upon  to  operate. 

Therefore,  to  give  your  technical  studies  their  full  value  after 
graduation,  you  must  be  prepared  to  quickly  acquire  in  the  school 
of  experience  the  ability  to  practically  and  efficiently  apply  your 
theoretical  knowledge,  but  you  must  also  quickly  learn  in  that 
school  what  the  business  world  requires  you  to  know  and  do. 

It  is  to  prepare  you  for  this  part  of  your  work  in  the  school 
of  experience  that  I  am  taking  up  with  you  the  work  of  my  special 
department. 


ACCOUNTING. 

October,  1904. 

In  the  reprints  of  lectures  and  magazine  articles  which  you 
have  been  required  to  read  you  have  been  furnished  with  suf- 
ficient reason  for  my  claim  that  the  engineer  should  be  pre- 
pared to  practice  his  profession  within  the  limits  set  by  com- 
mercial conditions,  and  that  also  the  engineer  should  be  familiar 
with  business  methods  and  practice.  Especially,  he  should  know 
the  language  of  business ;  namely,  the  language  of  the  accountant. 
Without  this  knowledge  of  the  language  of  the  accountant,  the 
engineer  is  unable  to  read  the  statements  that  give  the  final 
result  of  the  enterprises  in  which  he  is  engaged  except  through 
the  employment  of  an  interpreter;  or,  in  other  words,  he  must 
take  on  faith  any  and  every  statement  which  his  and  other  men's 
bookkeepers  and  accountants  make  to  him.  For  instance,  re- 
ferring to  Mr.  Turnbull's  lecture,  at  the  bottom  of  page  25  of  the 
Reprints    he  says: 

"We  will  suppose  that  we  are  doing  a  simple  merchandise 
business,  buying  and  selling.  We  shall  have  charged  all  our 
purchases  to  Merchandise  Account,  and  we  shall  have  credited  all 
our  sales  to  Merchandise  Account.  We  will  assume  that  our 
purchases  have  amounted  to  $100,000,  and  our  sales  to  $90,000, 
but  we  find  upon  taking  an  inventory  that  we  have  goods  on 
hand  worth  $25,000.  Now,  if  we  add  the  $25,000  to  the  $90,000 
at  credit  of  Merchandise  Account,  we  have  $115,000  as  against  a 
cost  of  $100,000.  It  is  evident  to  you,  therefore,  that  we  must 
have  made  $15,000  profit.  But  to  arrive  at  that  in  bookkeeping 
fashion,  we  debit  Merchandise  Account  with  $15,000  profit,  and 
credit  Profit  and  Loss  Account,  bringing  down  a  balance  to  the 
new  Merchandise  Account  of  $25,000,  being  the  $10,000  balance 
already  at  the  debit  plus  the  $15,000  profit  charged,  making  $25,- 
000  as  the  value  of  merchandise  and  the  debit  to  Merchandise 
Account  with  which  to  commence  the  new  fiscal  period.  Now 
we  find  that  we  have  $15,000  to  the  credit  of  Profit  and  Loss, 


58 


Business  Engineering. 


but  we  have  various  expense  and  other  debit  accounts  affect- 
ing the  result  of  the  business,  and  we  debit  Profit  and  Loss  and 
credit  these  various  accounts  with  their  respective  amounts;  (we 
may  have  also  credit  balances  to  other  accounts,  such  as  Inter- 
est  affecting  the  result,  and  these  we  credit  to  Profit  and  Loss), 

and  assuming  that  as  a  net  result  of  these  various  debits  and 
credits  to  Profit  and  Loss  we  have  a  balance  of  $10,000,  this 
then  is  the  net  gain  for  the  year,  and  we  transfer  it  to  our  in- 
dividual account  by  debiting  Profit  and  Loss  and  crediting  our 

account." 

I  have  found  with  this  class  and  the  two  previous  classes 
that  this  statement  as  written  could  not  be  followed  by  a  majority 
of  the  students.  I  am  certainly  warranted  in  believing  that  the 
members  of  our  senior  classes  (having  been  subjected  to  the 
'Veeding-out"  process  for  three  years)  are  above  the  average 
in  intelligence  and  ability  to  follow  out  a  more  or  less  abstruse 
proposition,  but  still  the  proposition  here  made  by  Mr.  Turn- 
bull  is  an  extremely  simple  one.  The  trouble,  then,  is  unques- 
tionably in  the  fact  that  the  students  do  not  understand  the 
language  in  which  the  statement  is  made.  Part  of  Mr.  Turn- 
bull's  statement  is  made  in  the  language  of  every-day  life  and 
part  in  the  language  of  the  accountant. 

Now,  let  me  make  this  same  statement,  employing  only  the 
language  of  every-day  life,  and  there  is  not  a  member  of  the 
class  who  cannot  follow  me. 

Jones  engages  in  a  simple  merchandise  business,  buying 
and  selling.  He  purchases  merchandise  which  costs  him  $100,- 
000.  Three-quarters  of  that  merchandise,  or  what  has  cost 
him  $75,000,  he  sells  during  the  year  for  $90,000.  The  expenses 
for  operating  the  business  for  the  year  amount  to  $5,000.  He 
has,  therefore,  made  a  gross  profit  on  his  sales  of  $15,000,  and 
it  has  cost  him  $5,000  to  carry  on  the  business  in  connection 
with  those  sales,  leaving  him  a  net  profit  of  $10,000. 

The  statement  as  thus  made  a  school-boy  can  follow.  But 
here  it  is  to  be  borne  in  mind  that  in  business  we  must  have 
a  method  of  recording  our  results  which  is  concise  and  based 
upon  principles  capable   of  universal  application.      If   the   en- 


Lecture  Notes. 


59 


gineer — and  especially  the  engineer  who  engages  in  industrial 
management — expects  to  be  able  to  read  the  statements  of  busi- 
ness results  without  depending  upon  outside  interpretation,  he 
must,  then,  as  I  have  said,  be  able  to  read  with  some  facility  in 
the  language  of  the  accountant.  In  the  example  from  Mr.  Turn- 
bull's  lecture  that  I  have  given  (and  it  is  an  extremely  simple 
example  and  selected  by  him  for  that  reason)  we  have  proved 
that  the  statement  could  not  be  followed  by  a  majority  of  the 
members  of  our  senior  classes  without  additional  explanation  or 
interpretation.  But  it  is  to  be  borne  in  mind  that  that  statement 
is  made  only  in  part  in  the  language  of  the  accountant.  We  may 
assume  then  that  if  it  had  been  made  entirely  in  the  language  of 
the  accountant  it  would  have  been  absolutely  unintelligible  to 
those  members  of  the  class  who  had  not  already  had  experience  in 
accounting. 

I  think,  then,  that  this  presentation  of  the  subject,  in  con- 
nection with  the  facts  and  arguments  which  have  been  brought 
before  you  in  the  ''Reprints,"  should  convince  you  that  a  knowl- 
edge of  accounting  is  not  only  important  but  absolutely  necessary 
to  the  engineer  who  aims  to  satisfactorily  fill  any  managerial 
position.  Now,  I  do  not  expect  to  be  able  to  make  bookkeepers  of 
our  students.  This  is  not  necessary,  nor  is  it  even  desirable.  I 
only  aim  to  give  you  such  a  knowledge  of  the  principles  of  double- 
entry  bookkeeping  that  you  will  be  able  to  read  without  assistance 
the  statements  of  results,  for  it  must  be  borne  in  mind  that  unless, 
by  detailed  analysis  of  the  statements  of  account,  you  are  able  to 
detect  inefficient  and  uneconomical  items  in  the  management  you 
are  certainly  unable  to  introduce  corrections  thereof.  A  compe- 
tent analysis  of  accounts  is  at  the  very  foundation  of  competent 
and  economical  management. 

The  bookkeeper  is  the  man  who  is  trained  to  do  the  actual 
work  of  bookkeeping  correctly  neatly  and  rapidly.  He  may  be 
an  admirable  bookkeeper,  but  a  very  poor  accountant.  That  is,  he 
may  be  able,  with  accuracy  and  rapidity  to  follow  the  lines  laid 
out  for  him  by  the  accountant,  but  he  may  not  have  such  an 
understanding  of  the  principles  and  the  details  of  the  business 
as  will  enable  him  to  lay  out  for  himself  the  system  of  accounts. 


* 


6o 


Business  Engineering. 


Now,  it  is  quite  possible  for  the  members  of  this  class  to 
obtain  such  a  knowledge  of  the  principles  of  accounts  that  they  can 
direct  such  an  expert  bookkeeper  as  to  the  proper  methods  to  be 
followed  without  having  that  expert  bookkeeper's  facility  in  the 
actual  performance  of  the  work. 

I  have  been,  more  than  once,  told  by  young  men  who  have 
taken  courses  in  bookkeeping  in  the  commercial  colleges  that  they 
regarded  it  as  time  wasted,  because  the  bookkeeping  methods 
followed  in  different  establishments  so  varied  that  very  likely  after 
having  learned  in  the  commercial  college  they  would  be  required 
to  take  a  position  where  these  methods  had  no  place.  If  this  is  a 
fair  statement  of  what  is  done  in  some  of  the  commercial  colleges, 
it  simply  goes  to  show  that  those  colleges  teach  methods  and  not 
principles.  I  am  reluctant  to  believe  that  this  is  true.  It  is  true 
that  the  methods  followed  in  different  establishments  vary  to  a 
great  extent.  The  methods  followed  generally  in  America  are  dif- 
ferent from  those  followed  on  the  Continent  of  Europe.  But  the 
same  general  principles  are  included  in  all  systems  of  double-entry 
bookkeeping,  and  if  our  students  get  a  firm  hold  on  those  princi- 
ples they  can,  with  some  little  effort,  analyze  the  statements  pre- 
pared from  any  well-kept  set  of  double-entry  books.  It  may  be 
necessary  to  have  the  details  of  accounts,  and  the  like,  explained, 
but  such  explanations  can  generally  be  obtained  when  necessary. 

Now,  I  have  referred  to  the  double-entry  system,  or  the  Italian 
system,  as  it  is  sometimes  called.  Mr.  Turnbull  in  his  lecture  has 
shown  that  there  are  two  systems,  the  single-entry  and  the  double- 
entry  systems.  The  single-entry  system  does  not  especially  inter- 
est us,  because  it  is  only  employed  by  retail  concerns;  or,  per- 
haps, to  be  more  accurate,  it  should  be  employed  only  in  such 
cases.  As  will  appear  later  on,  the  single-entry  system  does  not 
afford  any  check  as  to  the  correctness  of  the  transactions  recorded, 
whereas  the  double-entry  system  does  afford  as  complete  a  check 
as  can  be  devised. 

There  is  often  some  misunderstanding  as  to  the  meaning  of 
double-entry  in  this  connection.  Let  me  say  at  once  that  it  does 
not  mean  that  for  every  entry  made  by  the  single-entry  system, 
bv  the  double-entry  system  there  are  two  separate  entries.    It  does 


Lecture  Notes. 


6i 


mean,  however,  that  in  every  transaction  the  amounts  involved 
appear  upon  both  sides  of  the  books,  namely   the  debit  side  and 

the  credit  side. 

To  understand  this  a  little  better,  let  us  go  back.  Every  time 
that  Jones  made  a  purchase  of  merchandise  in  accumulating  his 
$100,000  worth  of  merchandise  stock,  the  man  from  whom  he 
purchased  made  a  sale,  and  every  time  that  Jones  made  a  sale  of 
part  of  that  merchandise,  the  man  to  whom  he  sold  it  made  a  pur- 
chase ;  that  is,  for  every  sale  there  is  a  purchase  and  for  every 
purchase  there  is  a  sale.  Or,  for  every  credit  there  is  a  debit  and 
for  every  debit  there  is  a  credit.  And  this  is  true  even  though 
each  of  these  credits  and  each  of  these  debits  do  not  appear  sepa- 
rately on  the  books  of  account.  As  you  will  later  see,  by  the  time 
the  transactions  are  finally  recorded  on  the  Ledger,  many  credits 
and  many  debits  may  have  been  consolidated ;  but  the  fact  remains 
that  each  side  of  each  transaction  will  in  time  find  its  place  in  the 
final  record.     You  know  the  old  saying  is  that  it  takes  two  to 

make  a  bargain. 

Then,  in  the  double-entry  system,  in  every  transaction,  in 

one  way  or  another,  both  the  credit  and  the  debit  sides  of  the 

transaction  are   recorded   on  the   books.     If  Jones   buys   from 

Robinson  $100  worth  of  merchandise,  Robinson  sells  to  Jones 

$100  worth  of  merchandise,  and  if  both  sides  of  the  transaction 

are  recorded,  $100  appears  on  each  side  of  the  final  book  of 

record,  namely  the  Ledger,  and  these  two  amounts  balance  each 

other;    and  this  is  true  with  all  other  transactions.     Hence  in 

this  final  book  of  record,  if  the  books  have  been  correctly  kept 

and  we  draw  off  a  statement  showing  the  balance  against  each 

account  we  will  find  that  the  balances  from  the  debit  side  sum 

up  to  the  same  amount  as  the  balances  from  the  credit  side;  or, 

if,  as  many  bookkeepers  do,  instead  of  taking  the  balances  we 

take  the  sum  of  the  items  on  one  side  and  the  sum  of  the  items 

on  the  other  side,  we  shall  again  find  that  the  sum  of  the  debit 

items  equals  the  sum  of  the  credit  items.     If  such  a  balance  is 

not  obtained,  namely  if  there  is  a  difference  between  the  sum 

of  the  debit  balances  and  the  sum  of  the  credit  balances  or 

•  between  the  sum  of  the  debit  items  and  the  sum  of  the  credit 


4 


62 


Business  Engineering. 


Lecture  Notes. 


63 


items,  we  know  that  some  mistake  has  crept  into  our  work. 

While  it  is  true  that  in  spite  of  the  check  obtained  through 
this  system  and  in  spite  of  the  care  that  may  be  taken,  errors 
will  creep  in  because  two  errors  of  a  like  amount  may  be 
made  which  will  balance  each  other,  or  an  amount  which  should 
be  posted  to  one  account  may  be  posted  to  the  correct  side  of 
another  account,  still,  this  does  not  disqualify  the  double-entry 
system,  for  after  years  and  years  of  experience  it  has  been  found 
to  afford  as  complete  a  system  of  checks  as  it  has  been  so  far 
possible  to  discover. 

I  have  spoken  of  the  final  record  as  the  Ledger.  It  might 
perhaps  seem  more  in  order  if  we  first  took  up  the  primary  records 
and  then  went  on  to  the  final  record,  but  the  result  we  are  looking 
for  is  to  be  found  in  the  Ledger.  Therefore,  I  will  first  consider 
that  and  then  work  back  from  the  result  to  the  means  employed  to 
obtain  the  result. 

If  the  members  of  this  class  who  are  interested  in  the 
Athletic  Association  had  occasion  to  distribute  against  the  sev- 
eral athletic  teams  certain  items  of  expense  they  might  perhaps 
take  a  sheet  of  paper  and  put  down  headings  to  designate  the 
several  teams.  As  each  item  was  analyzed  they  might  determine 
what  per  cent,  thereof  was  to  be  charged  against  each  team. 
Having  determined  the  per  cent.,  they  would  figure  out  and  put 
under  the  proper  heading  the  amount  so  determined.  They 
would  do  this  for  each  item  to  be  distributed.  Having  finished 
this  work  of  distribution  or  classification,  they  would  foot  up 
the  amounts  in  each  column  and  then,  to  check  up  as  to  the 
correctness  of  their  work,  they  would  see  if  the  sum  total  of 
these  several  amounts  as  distributed  in  these  several  columns 
equaled  the  total  of  the  column  of  items  before  distribution. 
In  a  simple  case  of  this  kind  probably  all  the  purposes  would 
be  served  by  such  a  method  carried  out  on  a  loose  sheet  of  paper, 
though  it  would  be  then  preferable  to  make  some  final  record 
in  case  some  question  might  arise  in  the  future.  But  in  a 
business  of  any  size,  the  amounts  of  money  which  are  spent 
and  the  amounts  of  money  which  are  received  and  all  transac- 
tions in  which  no  money  actually  passes,  have  to  be  recorded  in 


permanent  form  and  by  such  a  system  that  the  facts  can  be 
shown  at  a  moment's  notice.  If  a  man  is  owing  us  money  and 
from  time  to  time  he  is  making  payments  thereon  and  is  making 
further  purchases  from  us,  we  must  have  one  place  where  these 
several  transactions  can  be  summarized.  That  is,  we  must  keep 
an  account  with  him.  Or,  to  speak  in  a  more  general  way,  to 
analyze  the  results  of  our  business  we  must  be  prepared  to 
determine  what  different  branches  of  our  operations  have  cost 
us,  what  the  different  branches  have  returned  to  us  in  income 
and  what  has  been  the  final  result  either  in  profit  or  in  loss. 
It  will  be  necessary,  then,  to  classify  these  different  items  under 
proper  headings,  these  headings  or  titles  of  accounts  to  be  self- 
explanatory  as  far  as  possible.  These  accounts  must  be  so  kept 
as  to  lend  themselves  most  completely  to  analysis.  Now  the 
book  in  which  the  facts  are   so   classified  and   summarized  is 

called  the  Ledger. 

In  the  double-entry  system  all  debit  entries  are  carried  into 
the  left  dollars-and-cents  columns  and  all  credit  entries  into  the 
right  dollars-and-cents  columns.  This  is  the  case  with  the  Ledger 
and  all  the  other  regular  books  of  account.  Sometimes,  as  in 
the  Ledger,  this  division  is  accomplished  by  dividing  each  page 
into  debit  and  credit  sides  by  a  vertical  ruUng  through  the 
centre  of  the  page.  Sometimes,  as  in  the  Cash-Book,  the  two 
pages  which  open  opposite  to  each  other  are  employed  as  a 
couple,  the  left  page  for  debit  items  and  the  right  page  for  credit. 
Sometimes,  as  in  the  Journal,  the  debit  and  credit  dollars-and- 
cents  columns  are  side  by  side  at  the  right  side  of  each  single 
page,  the  debit  column,  however,  being  to  the  left  of  the  credit 
column.  This  is  an  arbitrary  arrangement.  If  it  had  been 
originally  decided  to  carry  the  debit  items  to  the  right  side  and 
the  credit  items  to  the  left  side,  the  accounts  could  have  been 
kept  just  as  accurately;  but  it  is  at  once  apparent  that  for  gen- 
eral convenience  there  should  be,  the  world  over,  a  uniform 
practice  in  this  regard.     Luckily,  this  is  the  case. 

But  here  comes  in  a  point  that  is  a  frequent  cause  of  con- 
fusion, especially  in  the  mind  of  the  man  not  very  familiar  with 
accounts.     Suppose  I  am  keeping  an  account  with  a  man.     If  I 


ll 


I 


64 


Business  Engineering. 


make  out  a  statement  of  that  account  from  my  standpoint;  that  is, 
from  my  side  of  the  transactions,  the  amounts  which  I  have  paid 
to  him  will  appear  on  the  credit  side  of  my  statement,  and  the 
amounts  which  he  has  paid  to  me  will  appear  on  the  debit  side  of 
my  statement.  But,  now,  suppose  that  he,  from  his  books,  renders 
the  statement  of  account  to  me.  Then  the  statement  is  prepared 
from  his  standpoint  and  while  the  two  statements  may  be  cor- 
rect and  identical  in  every  particular,  not  varying  to  the  extent  of 
one  cent,  still  every  item  which  on  my  statement  of  account  appears 
on  the  debit  side  will,  on  his  statement  of  account,  appear  on  the 
credit  side,  and  vice  versa.  Unfortunately,  it  is  not  always  ap- 
parent from  the  heading  of  the  statement  from  which  side  of  the 
transaction  the  statement  has  been  made.  It  is  in  such  matters  as 
these  where  the  European  bookkeepers  are  apt  to  be  more  gener- 
ally uniform  and  precise  than  those  of  America. 

To  repeat,  every  item  involved  in  our  several  transactions  has 
been  finally  recorded  in  the  Ledger  and  if  the  record  has  been 
correctly  kept  the  sum  of  the  items  on  the  debit,  or  left,  side  will 
equal  the  sum  of  the  items  on  the  credit,  or  right,  side,  and  unless 
they  do  so  foot  up  to  balance  we  must  accept  the  fact  that  there 
has  been  an  error  made  and  we  must  look  for  and  correct  it. 

Before  passing  on,  let  me  urge  you  to  consider  carefully  the 
point  above  made  as  to  the  reversal  of  the  debit  and  credit  items 
on  the  two  sets  of  books  as  kept  by  the  two  parties  to  any  one 

transaction. 

It  is  necessary  to  fully  appreciate  this  point  to  understand 
why  a  Ledger  balances  and  why  in  posting  from  the  Cash-Book  to 
the  Ledger,  as  later  to  be  explained,  the  items  on  the  left  (debit) 
side  of  the  Cash-Book  are  posted  on  the  right  (credit)  side  of  the 
Ledger,  and  the  items  on  the  right  side  of  the  Cash-Book  are 
posted  on  the  left  side  of  the  Ledger. 

We  now  come  to  the  question,  how  are  these  items  obtained 
for  the  Ledger?     What  is  the  basis  for  this  final  summarized 

record  ? 

The  system  of  primary  records  which  forms  the  basis  for  the 
Ledger  entries  varies  very  considerably,  but  in  general  we  may  say 
that  the  three  main  books  of  account  are  the  Cash-Book,  the 


Lecture  Notes. 


■I 


I 


J 


B 


6s 


Journal  and  the  Ledger.  Under  the  head  of  the  Journal  can  be 
included  certain  subsidiary  books,  which  perform  certain  parts  of 
the  Journal's  duty. 

Let  us  first  consider  the  Cash-Book.  Keeping  track  of  our 
cash  expenditures  and  cash  receipts  is,  of  course,  of  primary  im- 
portance. Therefore,  we  are  warranted  in  maintaining  a  special 
book  for  this  purpose  which  will  contain  the  facts  in  regard  to 
each  transaction  in  some  degree  of  detail.  In  this  Cash-Book  each 
left  hand  page  is  for  debit  entries  and  each  right  hand  page  is  for 
credit  entries.  The  debit  and  credit  entries  of  even  date  are  made 
on  the  pages  opposite  to  each  other.  If  there  are  more  entries 
of  a  certain  date  on  one  side  than  on  the  other,  and  so  one  page  is 
filled  up  while  the  opposite  page  is  only  partly  filled,  the  blank 
spaces  are  not  filled,  and  the  next  two  pages  are  opened  with 
entries  of  even  date.  The  reason  for  using  a  full  page  for  debits 
and  a  full  page  for  credits  instead  of  dividing  a  single  page  into 
debit  and  credit  sides,  is  because  the  record  should  be  sufficiently 
in  detail  and  it  is  desirable  that  the  record  should  only  occupy  a 
single  line. 

Now  let  us  first  think  of  what  we  mean  by  Cash.  It  is  an 
account  kept  with  ourselves.  If  there  was  only  one  owner  of  the 
business,  then  Cash  would  really  represent  that  owner.  But,  even 
then.  Cash  would  have  an  identity  of  its  own,  as  will  be  later  seen. 
Suppose  there  are  two  partners  to  the  business  and  each  puts  into 
the  business  $5,000  as  capital.  Then,  certainly,  when  that  money 
is  put  into  the  business  for  the  benefit  of  both  each  man  should  be 
individually  credited  with  $5,000.  The  business  as  a  whole  should 
credit  each  man  with  $5,000  and  therefore  the  business  as  a  whole 
should  be  debited  with  each  $5,000  received.  In  the  Cash-Book, 
which  represents  the  business  as  a  whole,  these  entries  would  apn 
pear  on  the  debit  side.  When  Cash  receives  money,  that  is,  when 
the  business  receives  money,  it  must  debit  itself  with  that  receipt. 
On  the  other  hand,  when,  in  the  course  of  business,  Cash  pays  out 
money,  Cash  Account  must  be  credited. 

Even  in  the  case  of  a  business  which  is  owned  and  controlled 
by  a  single  proprietor,  the  owner  of  the  business  may  be  concerned 
in  many  other  enterprises,  but  his  relation  to  this  particular  busi- 


n 


I  I 


66 


Business  Engineering. 


! 


ness  must  be  clearly  shown  in  the  books  of  this  concern.  Cash  Ac- 
count has  been  made  the  custodian  of  this  part  of  his  money  and, 
therefore,  Cash  Account  must  be  debited  and  the  proprietor  as  an 
individual  is  credited  through  an  account  which  maybe  called  Cap- 
ital Account.    This  is  more  readily  apprehended  in  the  case  of  a 
stock  company  in  which  the  capital  is  supplied  by  perhaps  many 
individuals  in  perhaps  widely  varying  amounts.     Here  it  is  evident 
that  the  business  as  a  whole  must  account  to  each  individual 
stockholder  for  the  capital  he  has  invested  with  the  concern.  The 
business  as  a  whole  has  received  the  money  and  placed  it  in  the 
Cash  Account  and  hence  Cash  Account  is  to  be  debited  and  the 
individual  stockholder  is  to  be  credited.    This  credit  to  the  stock- 
holders is  generally  shown  in  a  general  account  called  Capital 
Stock,  or  Capital  Stock—Common,  or  Capital  Stock— Preferred, 
as  may  be  necessary  to  indicate  the  character  of  the  stock  obliga- 
tion.   The  individual  holdings  are  certified  to  by  stock  certificates 
issued  to  the  stockholders.    As  these  stock  certificates  are  issued 
credit  is  given  on  a  Capital  Stock  Ledger  or  Record;  and  as  the 
certificates  are  cancelled,   owing  to  transfer  of  ownership,  the 
proper  individual  accounts  are  debited.    This  is  a  case  of  a  sup- 
plementary or  individual  Ledger  in  which  are  given  the  details  as 
to  individual  debits  and  credits,  the  general  conditions  only  being 
shown  on  the  General  Ledger.    It  should  be  unnecessary  to  point 
out  that  the  total  balance  shown  by  the  Individual  Ledger  should 
exactly  correspond  with  that  shown  by  the  General  Ledger.   The 
latter  shows  the  amount  of  capital  which  the  concern  has  to  ac- 
count for  (is  liable  for),  and  the  first  shows  who  are  the  individ- 
uals who  own  the  stock  and  to  whom  the  company  is  liable. 

Then  it  can  be  seen  that  Capital  Account  in  any  of  these 
cases  should  be  credited  with  the  capital  invested  in  the  business. 
But  the  capital  as  received  will  be  recorded  in  the  Cash-Book, 
and  as  it  is  received  by  Cash,  Cash  will  be  debited.  But  we  have 
seen  that  Capital  (collectively  and  individually)  should  be  cred- 
ited.    How  is  this  part  of  the  record  made? 

The  entry  on  the  Cash-Book  is  made  on  the  left  or  debit 
side,  and  that  shows  that  Cash  is  debited  as  it  should  be.  But 
the  descriptive  matter  of  the  entry  also  shows  from  whom  the 


Lecture  Notes. 


67 


money  is  received  and  why  it  is  received,  and  therefore  without 
any  additional  entry  it  shows  to  what  account  and  to  whom 
it  should  be  credited.  So  we  find  that  the  one  entry  on  the 
debit  side  of  the  Cash-Book  also  records  the  credit  side  of  the 
transaction.  This  is  an  important  point  and  must  be  fully  com- 
prehended. 

Now  let  us  follow  through  in  detail  the  entries  covering  one 
of  the  payments  made  to  Cash  on  account  of  capital.  We  will 
assume  that  we  have  to  do  with  a  stock  company;  the  shares 
being  $100  each  and  issued  at  par. 

John  Smith  subscribes  for  100  shares,  for  which  he  pays 
in  to  Cash  $10,000.  The  entry  is  made  on  the  debit  (left)  side  of 
the  Cash-Book — first  the  date  received,  then  the  title  of  the  ac- 
count (Capital),  then  the  name  of  the  man  from  whom  it  is  re- 
ceived (John  Smith),  and  then  the  amount  ($10,000).  In  due  time 
a  stock  certificate  will  be  issued  to  Smith,  and  on  the  Stock  Led- 
ger he  will  be  credited  with  the  ownership  of  100  shares  of  stock, 
the  record  including  the  detail  as  to  the  number  of  certificates 
issued,  the  number  of  shares  covered  by  such  certificates,  and 
the  serial  numbers  of  the  certificates.  Probably  a  single  certi- 
ficate of  100  shares  would  be  issued  and  the  record  would  be  so 
made,  showing  the  serial  number  of  the  certificate  for  identifica- 
tion.   This  takes  care  of  the  liability  to  the  individual. 

When  the  other  Cash-Book  entries  are  being  "posted"  into 
the  Ledger,  from  the  debit  entry  on  the  Cash-Book  (that  is,  debit 
to  Cash  because  Cash  has  received  the  $10,000)  Capital  Account 
in  the  General  Ledger  will  be  credited  with  $10,000. 

So  we  see  that  in  posting  from  the  Cash-Book  to  the  Ledger 
we  post  a  debit  entry  in  Cash  to  the  credit  side  of  some  account 
in  the  Ledger.  And  this  reversal  in  the  posting  is  due  to  the  fact 
that  we  are  taking  note  of  both  sides  of  the  transaction;  if  Cash 
is  debited  for  money  received  from  John  Smith  on  Capital  Ac- 
count, Capital  Account  must  be  credited  and  we  must  also  record 
the  fact  that  John  Smith  is  the  individual  to  whom  the  business 
is  responsible  for  that  part  of  the  capital.  We  have  now  seen 
that  Capital  Account  is  credited  on  the  General  Ledger,  and 
John  Smith,  the  individual,  is  credited  on  the  Stock  Ledger. 


\l 


||: 


68 


Business  Engineering. 


Lecture  Notes. 


69 


This  is  not  a  double  credit  against  a  single  debit  as  has 
been  suggested  by  some  of  the  students,  because  it  is  the  Gen- 
eral Ledger  which  shows  the  liability  as  a  whole  and  the  Stock 
Ledger  shows  how  this  liability  is  divided  up.  The  Stock  Led- 
ger simply  shows  the  details  in  connection  with  the  more  general 
record  in  the  General  Ledger. 

But  now  it  may  be  said,  There  is  no  double  entry  in  the 
General  Ledger;  there  is  a  debit  to  Cash  Account  which  is  re- 
corded on  the  debit  side  of  the  Cash-Book  and  this  debit  has 
served  as  the  basis  for  posting  $10,000  to  the  credit  of  Capital 
Account  in  the  General  Ledger,  but  there  is  no  debit  entry  m 
the  Ledger  to  balance  this  credit  entry  to  Capital. 

To  this  objection  I  reply  that  in  the  General  Ledger,  there 
is  kept,  or  there  should  be  kept,  a  Cash  Account.    This  account 
will  represent  Cash's  side  of  each  transaction ;  that  is,  the  oppo- 
site side  to  that  represented  by  Capital  Account  (or  John  Smith's 
Capital  Account,  if  we  kept  all  the  individual  capital  accounts 
in  the  General  Ledger   instead  of  summarizing  them  under  the 
general  heading  of  Capital  Account).     Having  posted  the  $10,- 
000  entry  from  the  debit  side  of  the  Cash-Book  to  the  credit 
side  of  the   Capital   Account   in   the   Ledger,   it   now   remams 
to  post  the  entry  into  Cash  Account  in  the  Ledger.     But  as 
this  Cash  Account  represents  the  same  side  of  the  transaction 
as  that  represented  in  the  Cash-Book,  we  post  from  the  debtt 
side  of  the  Cash-Book  to  the  debit  side  of  Cash  Account  in  the 
Ledger.     But  as  all  the  entries  on  the  debit  side  of  the  Cash- 
Book  must  be  posted  into  the  Cash  Account  in  the  Ledger  on 
the  debit  side  of  that  account   and  all  the  credit  entries  of  the 
Cash-Book  into  the  credit    side    of    the    Cash  Account  in  the 
Ledger,  we  may  as  well  wait  until  a  number  of  them  have 
accumulated  and  post  them  as  a  sum  into  the  Ledger.    The 
general    custom    is   to   "close"    the    Cash-Book   once  a  month. 
During  the  month  the  individual  items  have  been  posted  from 
the  Cash-Book  to  the  Ledger,  item  by  item,  to  the  several  ac- 
counts involved,  the  debit  items  to  the  credit  side  of  these  Led- 
ger accounts  and  the  credit  items  to  the  debit  side  of  these 
Ledger  accounts.    Thus  we  have  classified  or  distributed  the 


several  Cash  debits  and  credits  to  the  credit  and  debit  of  the 
accounts  opposed  to  Cash  in  the  several  transactions  of  the 
month.  Now  we  post  the  total  footing  of  all  the  entries  appear- 
ing in  the  debit  columns  of  the  Cash-Book  to  the  debit  of  Cash 
Account  in  the  Ledger,  and  we  post  the  total  footing  of  all  the 
entries  appearing  in  the  credit  columns  of  the  Cash-Book  to  the 
credit  of  Cash  Account  in  the  Ledger.  So  we  have,  item  by  item, 
all  the  debit  entries  in  the  Cash-Book  distributed  and  posted  to 
the  credit  side  of  the  several  accounts  in  the  Ledger  and,  item  by 
item,  all  the  credit  entries  distributed  and  posted  to  the  debit  side 
of  the  several  accounts  in  the  Ledger  and  all  the  debit  entries  of 
the  month  posted  in  one  amount  to  the  debit  side  of  Cash  Ac- 
count in  the  Ledger  and  all  the  credit  entries  of  the  month 
posted  in  one  amount  to  the  credit  side  of  Cash  Account  in  the 
Ledger.  So  every  entry  in  the  Cash-Book  has  been  posted  on 
both  sides  of  the  Ledger;  for  every  debit  there  has  been  a  credit 
and  for  every  credit  there  has  been  a  debit,  and  so  the  balance  in 
the  Ledger  between  debits  and  credits  is  maintained. 

Day  by  day,  as  the  cash  transactions  are  completed,  that  is, 
the  money  is  received  and  the  money  is  paid  out,  each  transac- 
tion is  entered  up  separately  on  the  Cash-Book.  Cash  received 
is  entered  on  the  left  page,  namely  the  debit  page,  and  cash  paid 
out  is  entered  on  the  right  page,  namely  the  credit  page.  The 
fact  that  debit  entries  are  made  to  the  left  and  credit  entries  to 
the  right  you  have  to  memorize,  for  as  I  have  said,  it  does  not 
depend  upon  principle.  It  is  an  arbitrary  arrangement,  for- 
tunately accepted  by  all  so  that  uniformity  of  practice  through- 
out the  business  world  is  obtainable. 

Take  another  item :  We  may  pay  out  money  for  the  salary 
of  the  bookkeeper  during  the  first  month.  That  amount,  being 
paid  out  by  Cash,  must  be  credited  to  Cash;  that  is,  "Cash"  has 
accounted  to  that  extent  for  the  money  entrusted  to  it.  But  it 
must  be  charged  against  either  the  individual  or  some  account 
which  keeps  track  of  this  part  of  our  year's  expenses,  say  Salary 
Account  or  Expense  Account,  according  to  how  we  classify  our 
accounts.  Again  you  see  that  what  is  written  up  as  a  credit 
on  the  right  side  of  the  Cash-Book  is  posted  as  a  single  debit 


I 


70  Business  Engineering. 

to  Salary  Account  in  the  Ledger :  at  the  end  of  the  month,  the 
total  footing  of  the  Cash  credit  columns  will  be  posted  to  the 
credit  of  Cash  Account  in  the  Ledger  and  this  item  of  Cash  paid 
to  the  bookkeeper  will  be  included  in  this  total.  So  we  have  all 
the  credit  items  on  the  Cash-Book  classified  and  distributed 
throughout  the  Ledger  on  the  debit  side  of  the  accounts  con- 
cerned and  all  these  Cash  credit  items  posted  in  bulk  in  the 
Ledger  on  the  credit  side  of  Cash  Account. 

Of  course,  there  should  be  no  reversal  of  the  posting  of 
Cash,  because  Cash  Account  in  the  Ledger  means  exactly  the 
same' as  in  the  Cash  Book;  that  is,  we  are  considering  the  same 
side  of  the  transaction  in  the  Ledger  that  we  have  considered 
in  the  Cash-Book  entries.  From  each  side  of  the  Cash-Book 
we  have  posted  into  the  Ledger  the  implied  side  of  each  transac- 
tion, item  by  item.  We  have  later  posted  to  the  same  side  of  the 
Ledger  as  that  in  which  the  items  appear  in  the  Cash-Book 
the  total  of  these  items  and  so  we  have  on  the  Ledger  for  every 
debit  a  credit  and  for  every  credit  a  debit,  but  we  do  not  find 
them  item  by  item.  We  find  them  in  one  case  in  bulk  and  m 
the  other  case  itemized.  That  is,  those  amounts  which  on  the 
credit  side  of  the  Ledger  appear  in  itemized  form,  appear  under 
Cash  Account  in  bulk  on  the  debit  side,  and  vice  versa.  And 
so  the  Ledger  accounts  are  in  this  case  kept  in  balance. 

I  have  written  this  at  great  length  and  repeated  myself  ad- 
visedly, for  I  have  found  in  my  classes  that  the  students  seem  to 
have  great  difficulty  in  understanding  why  this  reversal  in  the 
posting  from  the  Cash-Book  to  the  Ledger  takes  place.  When 
they  do  fully  comprehend  this  point,  they  will  have  secured 
already  a  fair  idea  of  what  is  involved  in  double-entry  book- 
keeping. 


t 


ACCOUNTING  CONTINUED. 

November,   1904. 

In  this  second  paper  on  Accounting  I  shall  deal  more  with 
methods  than  in  the  first  paper,  but  I  shall  deliberately  repeat 
myself  in  my  desire  to  enforce  a  right  understanding  of  princi- 
ples. 

As  is  my  practice,  I  shall  here  try  to  answer  questions  which 
have  already  been  suggested  by  my  talks  and  I  shall  not  regret  it 
if  I  set  your  minds  working  on  other  questions. 

Let  me  first  repeat  that  I  am  not  trying  to  make  bookkeepers 
of  you  but  to  give  you  the  opportunity  to  acquire  a  knowledge  of 
Accounting. 

Some  of  you  have  been  puzzled  at  the  distinction  I  have 
drawn  between  the  accountant  and  the  bookkeeper. 

To  be  an  efficient  bookkeeper  a  man  should  be  a  good  pen- 
man, writing  a  neat  and  legible  hand  and  preferably  writing  it 
with  some  degree  of  rapidity.  He  should  be  able  to  accurately 
and  rapidly  add  long  columns  of  figures,  preferably  more  than 
one  column  at  a  time.  He  should  be  able  to  accurately  and  rapid- 
ly perform  examples  in  subtraction.  He  should  have  the  ability 
and  temperament  that  would  enable  him  to  concentrate  his  mental 
processes  continuously  for  many  hours  upon  details  so  that  he 
will  not  be  liable  to  make  mistakes  due  to  absent-mindedness, 
such  as  reading  657  and  writing  down  therefor  756.  He  should 
have  a  certain  sharpness  and  alertness  of  mind  to  enable  him  to 
quickly  determine  where  best  to  look  for  the  sources  of  error 
when  his  accounts  refuse  to  balance.  It  will  also  be  a  great  ad- 
vantage if  he  has  some  inventive  capacity  which  can  so  well  be 
employed  in  devising  labor-saving  bookkeeping  methods  specially 
applicable  to  the  business  in  hand. 

To  be  capable  as  an  accountant,  much  of  this  skill  of  hand 
and  readiness  of  performance  is  not  actually  necessary.  The  ac- 
countant must  be  able  to  direct  the  bookkeeper.     Therefore,  he 


72 


Business  Engineering, 


should  have  a  complete  knowledge  of  the  principles  of  accounting 
and  such  a  sufficient  knowledge  of  business  methods  in  general 
as  will  qualify  him  to  apply  the  principles  of  accounting  to  meet 
the  requirements  of  any  particular  business.  He  should  be  able 
to  recognize  where  his  special  training  should  be  supplemented 
by  the  special  training  of  the  skilled  business  and  technical  man- 
ager. He  must  be  competent  to  devise  such  a  system  of  reports 
as  will  place  before  the  management,  comprehensively  and  in  de- 
tail, the  results  obtained  from  the  business.  Thus  it  is  seen  that 
he  must  be  much  more  than  a  bookkeeper. 

It  is  true  that  most  of  our  expert  accountants  are  or  have 
been  expert  bookkeepers.  Through  lack  of  practice  in  the  actual 
performance  of  bookkeeping  work  they  may  have  lost  some  of  the 
mechanical  and  mental  ability  to  perform  accurately  and  quickly, 
but  their  thorough  drill  in  bookkeeping  is  still  of  great  assistance 
to  them  in  the  application  of  principles  through  methods  to  meet 
varying  requirements  and  in  the  reading  and  understanding  of 
books  and  accounts  wherein  the  same  principles  have  been  applied 
by  means  of  widely  varying  methods. 

We  may  then  liken  the  distinction  between  the  bookkeper 
and  the  accountant  to  the  distinction  between  the  mechanic  and 
the  engineer. 

Here  at  ''Stevens,"  in  training  you  to  be  engineers,  we  put 
you  through  a  limited  drill  in  the  shops,  not  with  the  idea  that  we 
can  during  the  limited  time  at  our  disposal  qualify  you  as  me- 
chanics, but  that  we  can  give  you  some  appreciation  of  the  princi- 
ples involved  in  efficient  shop  practice  and  of  how  the  engineer's 
designs  are  realized  in  the  shop.  And  in  this  connection  you  are 
shown  in  principle,  if  not  in  detail,  that  the  engineer  must  modify 
his  designs  to  meet  the  requirements  of  the  most  efficient  and  eco- 
nomical shop  practice. 

If  before  coming  to  "Stevens"  the  student  has  "served  his 
time"  as  a  mechanic,  so  much  the  better  if  he  also  has  the  men- 
tality to  be  something  more  than  a  mechanic.  Thus  with  this 
course  in  the  principles  of  accounting,  it  is  better  if  the  students 
have  had  some  training  in  bookkeeping;  such  training  is  not, 
however,  necessary  and  is  a  handicap  if  it  leads  them  to  depend 


Lecture  Notes, 


73 


upon  their  acquired  knowledge  of  methods  and  so  neglect  this 
instruction  in  principles. 

Coming  now  to  a  consideration  of  some  of  the  bookkeeping 
methods  employed  to  meet  the  requirements  of  accounting,  we  see 
at  once  that  these  methods  must  provide  a  correct  and  permanent 
record  of  all  transactions  in  which  money  or  the  equivalent  has 
been  transferred. 

The  scheme  through  which  these  methods  are  to  be  applied 
and  the  actual  practice  of  the  methods  must  be  such  as  to  meet 
the  requirements  just  as  far  as  is  possible  without  making  the 
bookkeeping  of  more  importance  than  the  transactions  them- 
selves : 

1.  The  record  should  be  completely  self-explanatory  so  that 
at  any  time  in  the  future  the  exact  facts  in  regard  to  a  transaction 
may  be  recovered  without  the  assistance  of  memory. 

2.  All  the  transactions  should  be  so  classified  that  their  com- 
bined effect  over  any  given  period  or  at  any  time  during  that 
period  may  be  ascertained  with  ease  and  accuracy. 

Let  me  acknowledge  at  once  that  these  two  objects  are  not 
easily  attained;  nevertheless,  we  should  never  be  satisfied  with 
anything  less. 

In  the  effort  to  develop  a  completely  self-explanatory  record, 
unless  a  controlling  common-sense  is  continually  exercised,  a  sys- 
tem of  red-tape  may  be  developed  which  will  be  out  of  all  pro- 
portion to  the  actual  requirements  of  the  business.  The  engineer 
is  constantly  required  to  keep  proportions  in  mind ;  here  is  an  ex- 
cellent place  to  exercise  his  developed  faculty  in  that  direction. 

On  the  Continent  of  Europe  the  bookkeeping  systems  are 
often  burdened  with  red-tape.  The  same  record  is  often  repeated 
in  various  forms.  Facts  which  are  fully  developed  and  recorded 
in  books  outside  of  the  regular  books  of  account  are  again 
recorded  in  detail  in  these  regular  books  of  account. 

In  Great  Britain  and,  I  believe,  still  more  so  in  this  coun- 
try, such  costly  repetitions  are  more  often  avoided. 

There  is  something  to  be  said  in  favor  of  each  system. 
By  what  we  may  call  the  continental  method,  the  full  record  is 
to  be  more  nearly  found  in  the  regular  books  of  account    and. 


! 


.  H 


^1 


?h 


7^  Business  Engineering. 

clerical  labor  being  cheaper,  the  additional  cost  is  not  so  seri- 
ous as  it  would  be  with  us. 

Here  we  save  time,  which  costs  money,  and  for  the  ordi- 
nary run  of  business  our  records  are  less  complicated. 

But  in  connection  with  our  practice  it  is  of  still  greater 
importance  than  with  the  continental  practice  that  all  our  letter 
copy-books,  invoice  copy-books,  contract  books  and  all  sub- 
sidiary and  statistical  book  records  should  be  accurately  kept 
and  carefully  preserved  for  reference  in  case  of  future  question 
or  dispute  making  it  necessary  to  follow  the  condensed  record 
as  found  in  the  regular  books  of  account  back  to  the  primary 
and  subsidiary  records. 

We  are  now  naturally  led  to  consider  the  question— What 
are  the  books  usually  employed  in  double-entry  bookkeeping? 
No  matter  what  the  system  of  bookkeeping,  certain  books 
should  be  kept  for  our  safety  as  well  as  for  our  convenience, 
such  as  letter-press  copy-books  in  which  every  letter  and  every 
accompanying  exhibit  or  enclosure  should  be  copied  unless  the 
enclosures  (invoices,  for  example)  are  of  such  a  nature  as  to 
suggest  that  they  be  copied  in  a  special  press  copy-book.  In 
one  book  or  another,  all  of  our  communications  should  be  copied 
(preferably  press-copied,  as  then  we  have  a  facsimile  copy)  be- 
fore they  are  sent  out. 

There  are  other  books  of  record,  or  statistical  books,  which 
will  differ  in  function  and  form  according  to  the  business  for 
which  they  are  designed. 

Under  this  last  head  might  be  included  the  contract  record 
of  a  contractor  in  which  should  appear  first  a  memorandum  of 
the  chief  features  of  the  contract  and  a  specific  reference  to  the 
book  in  which  the  full  text  of  the  contract  is  recorded.  Then 
should  be  entered  all  the  items  included  in  the  contract,  and 
there  should  be  appropriate  columns  in  which  to  record  against 
each  item  the  date  when  ordered,  when  shipped,  when  received 
as  shown  by  the  actual  acknowledgment  of  receipt,  the  cost  in- 
cluding freight  and  cartage,  &c.,  &c.,  and  finally  the  total  cost 
of  each  item.  In  passing,  let  me  point  out  that  such  a  record 
is  of  inestimable  value  to  the  contractor   provided  it  is  consci- 


Lecture  Notes. 


75 


entiously  kept  up  and  always  made  to  finally  agree  with  the 
record  as  found  in  the  regular  books  of  account ;  that  is,  with  the 
Treasurer's  figures  of  cost.  Such  a  record  affords  the  oppor- 
tunity to  check  up  estimates  of  cost  with  the  itemized  records 
of  cost  in  the  case  of  completed  contracts  and  it  also  continually 
reminds  us  of  the  wisdom  of  tabulating  in  advance  all  the  items 
required  in  a  certain  contract  instead  of  waiting  for  a  reminder 
in  the  form  of  a  notice  that  the  work  of  construction  is  stopped 
or  delayed  because  some  little,  perhaps  inexpensive,  part  has 

been  forgotten. 

There  are  many  other  such  special  records,  the  need  for 
which  is  suggested  by  the  varying  requirements  of  different  lines 
of  business,  such  as  the  meter  records  of  a  gas  company,  the 
policy  record  of  an  insurance  company,  the  car  record  of  a 
railroad  company,  the  time  record  of  any  industrial  concern, 
record  of  bills  payable,  record  of  bills  receivable,  &c.,  &c. 

All  these  books  so  far  mentioned  we  may  roughly  include 
in  one  class  as  auxiliary  and  statistical  books. 

We  now  come  to  a  consideration  of  the  books  included  in 
the  other  class— the  regular  or  principal  books  of  account. 

These  include,  according  to  certain  authorities,  many  books, 
some  of  which  would  be  by  other  authorities  included  with  the 
auxiliary  or  statistical  class. 

For  the  sake  of  simplicity,  we  can  say  that  these  principal 

books  of  account  are  the 

Cash-Book, 

Journal, 

Ledger. 
Some  authorities  will  claim  that  the  Cash-Book  is  a  portion 
of  the  Ledger  which  is  set  apart  from  the  other  accounts  because 
this  account  has  to  be  kept  in  greater  detail  and  hence  can  be 
kept  more  conveniently  in  a  book  of  different  design  from  that 
adapted  to  the  convenient  keeping  of  the  other  Ledger  accounts. 
Others  will  claim  that  the  Cash  Account  is  so  set  apart  because 
cash  transactions  should  be  recorded  at  once,  whereas  all  other 
entries  can  be  posted  from  the  Journal  and  Cash  Account  when 


76 


Business  Engineering, 


most  convenient ;  for  having  completed  the  chronological  record 
and  having  kept  up  the  cash  record  ready  for  instant  reference 
nothing  is  risked  by  completing  the  Ledger  record  when  not 
pressed  for  time.  I  can  supply  another  reason;  namely,  that 
as  it  is  desirable  to  have  the  Ledger  records  in  compact  form,  if 
the  details  of  Cash  Account  were  included  within  the  compass  of 
the  Ledger  binding  we  should  have  either  a  very  bulky  volume 
or  be  obliged  to  frequently  transfer  all  of  the  accounts  to  a  new 
Ledger  because  the  space  taken  to  record  the  many  cash  transac- 
tions item  by  item  had  filled  all  the  spare  leaves;  whereas  by 
keeping  Cash  Account  in  a  book  by  itself  only  that  part  of  the 
Ledger  has  to  be  often  renewed. 

But,  reason  as  we  may,  it  is  found  desirable  to  have  a  sepa- 
rate book  in  which  to  fully  record  in  chronological  order  all  trans- 
actions in  which  cash  has  changed  hands. 

I  prefer  to  treat  the  Cash-Book  as  a  separate  book  and  then 
summarize  in  the  Ledger  proper,  under  the  heading  Cash  Ac- 
count, all  the  transactions  which  are  given  in  detail  in  the  Cash- 

Book. 

This  is  done  by  "posting"  from  the  credit  (or  creditor)  side 
of  the  Cash-Book  the  total  footings  in  one  amount  to  the  credit 
side  of  Cash  Account  in  the  Ledger,  and  the  total  footings  of  the 
debit  (or  debtor)  side  of  the  Cash-Book  to  the  debit  side  of  Cash 
Account  in  the  Ledger. 

This  makes  the  Ledger  complete  in  itself,  and  a  balance  can 
be  struck  by  taking  off  the  balances  of  all  the  accounts  in  the 
Ledger  without  having  to  go  to  another  book — the  Cash-Book — 
to  obtain  the  Dr.  or  Cr.  balance  of  Cash  Account  to  include  with 
the  other  Ledger  accounts. 

As  this  requires  only  the  additional  posting  from  the  Cash- 
Book  to  the  Ledger  of  two  more  items  per  month— namely,  the 
total  Dr.  footing  and  the  total  Cr.  footing— consuming  say  one- 
half  of  a  minute  a  month,  or  six  minutes  a  year,  I  can  find  no 
valid  argument  to  oppose  to  the  course  I  here  recommend. 

Here  you  sec  at  once,  we  are  discussing  variations  in  the 
methods  employed  to  put  in  practice  the  same  principles.  There- 
fore it  is  not  a  vital  point  and  authorities  can  safely  disagree. 


Lecture  Notes, 


77 


The  Journal  is  a  book  in  which  transactions  are  recorded  in 
chronological  order  with  regard  to  both  sides  of  the  transaction 
and  such  explanation  is  included  as  will  make  the  entry  itself 
completely  self-explanatory  or  will  furnish  such  definite  references 
to  other  books  of  record,  naming  the  book  and  page,  as  will  fur- 
nish a  completely  self-explanatory  record  of  the  entries  carried 
(posted)  from  the  Journal  into  the  Ledger. 

Some  authorities  would  amend  this  statement  by  saying:— 
"The  Journal  is  a  book  in  which  all  transactions  are  recorded, 
&c."  That  is,  some  claim  that  all  transactions  should  be  journal- 
ized, including  all  cash  items  which  are  completely  explained  in 
the  chronological  record  contained  in  the  Cash-Book. 

I  prefer  to  use  the  Journal  only  for  such  entries  as  are  not 
completely  set  out  for  posting  into  the  Ledger  in  some  other 
book  which  we  include  in  our  list  of  principal  books  of  account. 

The  Ledger  is  the  book  in  which  all  the  entries  covering  all 
transactions  are  stored  up  in  convenient  form  for  future  reference. 
It  is  the  book  in  which  all  the  original  entries  gathered  from  the 
Cash-Book,  the  Journal  and  other  books  which  may  be  employed, 
as  later  to  be  explained,  are  entered  under  their  respective  account- 
titles  and  in  the  proper  columns ;  viz..  Dr.  or  Cr. 

The  Ledger,  therefore,  shows  the  final  summing  up  of  all 
business  transactions  and  to  it  we  refer  to  learn  the  Dr.  or  Cr. 
balance  of  any  account,  personal  or  impersonal. 

Those  of  you  who  have  had  some  experience  in  bookkeeping 
may  be  ready  to  ask  why  I  have  not  included  in  my  list  of  prin- 
cipal books  of  account,  the  Day-Book,  Sales-Book,  Invoice-Book, 
Petty  Cash-Book,  &c. 

The  Day-Book  is  intended  to  receive  in  chronological  order 
the  primary  record  of  all  transactions,  including  purchases  and 
sales.  Where  the  transactions  are  so  numerous  as  to  call  for  it 
as  a  matter  of  convenience,  the  sales  are  recorded  in  a  separate 
Sales-Book  and  the  purchases  are  recorded  in  a  separate  Invoice- 
Book. 

But  all  of  this  can  be  done  in  the  Journal,  and  hence  these 

books  can  be  considered  as  sections  of  the  Journal. 

The   Petty  Cash-Book  is  a  book  in  which  for  greater  con- 


■i'li 


* 


78 


Business  Engineering. 


venience  the  small  cash  payments  are  recorded  in  chronological 
order,  and  later  carried  into  the  general  Cash-Book  in  one  entry, 
say  at  the  end  of  the  month. 

So  the  principal  books  of  account  boil  down  to  the  Cash- 
Book,  the  Journal  and  the  Ledger ;  and  according  to  English  au- 
thorities the  Cash-Book  is  merged  in  the  Ledger,  so  then  we  have 
only  the  Journal  and  Ledger. 

I  will  now  show  a  Journal,  a  Cash-Book  and  a  Ledger  in  their 
simplest  forms  and  include  a  few  simple  entries  to  show  how 
these  books  work  together. 


JOURNAL. 

• 

(A  Single  Page.) 

1 

1901 

Dr.                       Cr. 

Nov. 

15 

Merchandise,  Dr. 

to  Jno.  Smith. 
100  bbls.  ffour  @  $4.50. 

450 

00 

460 

00 

17 

Henry  Herbert,  Dr. 

to  Merchandise. 
100  bbls.  flour  (^  $6. 

600 

00 

600 

00 

Lecture  Notes. 


LEDGER. 


79 


(The  Dr.  and  Cr.  items  of  same  account  are  on  the  one  page.) 


Dr. 


19 


Dec. 


10 


Dr. 


19 
Nov. 


04 
17 


To  cash. 


To  Journal. 


John  Smith. 


460 


00 


19 
Nov. 


04 
15 


By  Journal. 


Henry  Herbert. 


600 


00 


19 
Dec. 


04 
12 


By  cash. 


8 


Dr. 

Expense. 

Cr. 

19 

04. 

Dec 

16 

To  cash. 

2 

16 

BO 

Dr. 

Merchandise 

• 

• 

Cr. 

19 

04 

19 

04 

Nov. 

15 

To  Journal. 

1 

450 

00 

Nov. 

17 

By  Journal. 

1 

500 

00 

14 

Cr. 


450 


00 


Cr. 


600 


00 


8o 


Business  Engineering. 


CASH 


3 

Dr. 


Dec. 


12 


To  Henry  Herbert 


100  bbls.  flour. 


26 


500 


00 


In  the  Journal  the  entries  arc  made  in  chronological  order. 
The  Dr.  and  Cr.  amounts  are  shown  on  the  same  page.  In  the 
form  shown  the  two  columns  for  Dr.  and  Cr.  are  side  by  side  at 
the  right  of  the  page,  the  Dr.  column,  however,  to  the  left  of  the 
Cr.  column,  thus  conforming  to  the  arbitrary  rule  that  Dr.  items 
shall  go  to  the  left  and  Cr.  items  to  the  right.  The  titles  of  the 
accounts  appear  in  the  main  space  in  the  centre,  the  date  in  the 
columns  at  the  left. 

In  the  Cash-Book  the  entries  are  made  in  chronological  order, 
the  Dr.  items  on  one  page  and  the  Cr.  items  on  the  opposite  page 
to  the  right.  In  the  column  between  the  descriptive  matter  and 
the  columns  for  dollars  and  cents  are  placed  the  numbers  of  the 
pages  in  the  Ledger  on  which  are  shown  the  accounts  to  which 
the  cash  items  have  been  posted.  For  instance,  Henry  Herbert's 
account  is  supposed  to  be  on  page  25  of  the  Ledger. 

In  the  Ledger  the  entries  are  in  chronological  order  as  far 
as  each  account  is  concerned,  but  the  several  accounts  are  placed 
in  the  book  as  found  to  be  most  convenient.  The  entries  are  scat- 
tered through  the  book,  following  the  titles  of  accounts.  Here  the 
Dr.  and  Cr.  items  are  on  a  single  page  but,  unHke  the  Journal, 
the  page  is  divided  vertically  through  the  centre,  the  left  half 
being  devoted  to  the  Dr.  items  and  the  right  half  to  the  Cr.  items. 

These  books,  especially  the  Cash-Book  and  the  Journal,  are 
ruled  in  different  ways  to  meet  the  special  wants  of  the  business 
concerned  or  the  individual  opinions  of  the  bookkeeper  or  ac- 
countant in  charge.     For  instance,  in  the  Journal  sometimes  the 


Lecture  Notes. 


81 


BOOK. 


1904. 


Cr. 


Dec. 


10 
16 


By  Jno.  Smith 
"   Expense  acct. 


100  bbls.  flour. 

Webster  &  Co.,  stationery 


14 
3 


450 
16 


00 
50 


Dr.  dollars-and-cents  columns  are  on  the  left  side  of  the  page,  the 
Cr.  columns  on  the  right  side,  and  the  space  for  descriptive  mat- 
ter in  between. 

Again,  Cash  and  other  books  are  frequently  ruled  with  extra 
dollars-and-cents  columns  to  receive  the  entries  for  certain  ac- 
counts, leaving  the  one  column  as  before  for  miscellaneous  items. 
For  instance,  there  might  be  on  each  side  of  the  Cash-Book  an 
extra  dollars-and-cents  column  for  Merchandise  Account,  for  the 
reason  that  a  large  part  of  all  the  entries  passing  through  the 
Cash-Book  were  on  account  of  Merchandise.  Then  these  extra 
columns  would  be  headed  "Merchandise  Account"  and  the  other 
columns  ''General"  or  ''Miscellaneous."  Then  the  total  footings  of 
the  merchandise  columns  could  be  carried  into  the  General  Ledger 
in  one  Dr.  item  and  one  Cr.  item  at  the  end  of  the  month,  making 
a  saving  in  labor,  more  or  less  important  according  to  the  volume 
of  business  involved. 

But  the  principle  remains  the  same. 

Coming  back  to  the  examples  I  have  given,  let  us  trace  the 
entries  through  the  several  books. 

In  the  Journal  is  recorded  first  the  purchase  and  receipt  from 
John  Smith  of  100  barrels  of  flour.  We  debit  the  impersonal  or 
speculative  account,  Merchandise,  and  we  credit  John  Smith  with 
$450. 

Then  we  record  the  sale  of  100  barrels  of  flour  to  Henry 
Herbert  at  $5  per  barrel.  We  debit  Herbert's  account  and  credit 
Merchandise  Account  with  $500.    Through  Merchandise  Account 


[J 


82 


Business  Engineering. 


we  wish  to  keep  track  of  the  losses  and  gains  from  the  purchase 
and  sale  of  merchandise;  so  for  all  merchandise  purchased  we 
debit  the  account  and  for  all  merchandise  sold  we  credit  the  ac- 
count. If  at  the  end  of  a  certain  time  we  wish  to  ascertam  the 
result  of  our  trading  in  merchandise,  we  deduct  the  total  of  the 
debit  items  from  the  total  of  the  credit  items  and  the  remainder 
is  the  gross  profit  from  our  trading  in  merchandise.  If  the  total 
of  the  Dr.  items  exceeds  the  total  of  the  Cr.  items,  it  is  shown 
that  the  trading  has  resulted  in  a  loss. 

We  credit  John  Smith  with  $450  because  he  has  delivered 
to  us  $450  worth  of  flour.  We  debit  Herbert  with  $500,  because 
we  have  delivered  to  him  $500  worth  of  flour. 

Coming  now  to  the  Cash-Book,  on  December  lOth  we  pay 
Smith  for  the  flour  received  from  him,  so  we  credit  Cash  with 
having  paid  him  and  this  entry  also  implies  a  debit  to  Smith. 

On  December  12th  Herbert  pays  us  for  the  100  barrels  of 
flour  sold  to  him  and  charged  on  the  Journal.  This  $500  is  Dr.  to 
Cash  because  Cash  receives  the  money,  and  by  implication  this 
Dr.  entry  to  Cash  makes  a  Cr.  entry  to  Herbert. 

On  December  i6th  we  pay  out  $16.50  for  stationery  and  we 
debit  this  to  Expense  Account,  to  which  account  we  expect  to 
charge  miscellaneous  items  of  expense  during  the  year,  so  that 
we  may  have  at  the  end  of  the  year  a  summar>^  of  the  cost  of  all 
the  expense  items  included  in  this  account  according  to  our  pre- 
determined classification. 

Now  coming  to  the  Ledger : 

We  "post"  the  entries  from  the  Journal  and  the  Cash-Book 
into  the  proper  accounts  in  the  Ledger. 

As  I  have  alreadv  explained,  the  entries  in  the  Journal  are 
complete.  That  is,  the  Dr.  and  the  Cr.  side  of  each  transaction 
is  shown ;  each  amount  is  shown  twice,  once  in  the  Dr.  column 
and  once  in  the  Cr.  column.  So  in  posting  into  the  Ledger  we 
post  from  the  Dr.  column  of  the  Journal  into  the  Dr.  column  of 
the  proper  account  in  the  Ledger  and  from  the  Cr.  column  of  the 
Journal  into  the  Cr.  column  of  the  proper  account  in  the  Ledger. 
But  when  we  post  from  the  Cash-Book  into  the  Ledger  we 
have  to  remember  that  what  is  to  the  Dr.  of  Cash  is  to  the  Cr.  of 


I 


Lecture  Notes. 


83 


Herbert,  and  that  what  is  to  the  Cr.  of  Cash  is  to  the  Dr.  of  Smith 
and  to  the  Dr.  of  Expense  Account. 

So  in  posting  these  items  from  Cash-Book  into  Ledger  we 
post  from  the  left  or  Dr.  side  of  Cash  to  the  right  or  Cr.  side  of 
the  Ledger ;  and  from  the  right  or  Cr.  side  of  Cash  to  the  left  or 
Dr.  side  of  the  Ledger. 

Then,  if  we  summarize  in  the  Ledger  the  Cash  Account  as 
shown  in  detail  in  the  Cash-Book,  as  I  have  recommended,  at 
the  end  of  the  month  we  post  the  total  Dr.  footings  of  Cash- 
Book  into  Cash  Account  in  the  Ledger  on  the  Dr.  side,  and 
the  total  Cr.  footings  of  Cash-Book  into  the  Cash  Account  in 
Ledger  on  the  Cr.  side.  There  is  no  reversal  in  the  posting  in 
this  case,  because  Cash  Account  in  the  Ledger  is  simply  a  con- 
densed form  of  Cash  Account  as  shown  in  the  Cash-Book. 

If,  according  to  the  older  practice,  a  practice  still  maintained 
by  many,  we  journalized  all  Cash  items,  the  entries  I  have  shown 
in  the  Cash-Book  would  be  as  follows : 


1904. 


JOURNAL. 


Dr. 


Cr. 


Dec. 


10  II  Jno.  Smith,  Dr. 

to  Cash. 
Payment  in  full  for  100  bbls.  flour. 

12      Cash  Dr. 

to  Henry  Herbert. 
Received  in  full  for  100  bbls.  flour. 

16      Expense  acct.,  Dr. 
to  Cash. 
P'd  to  Webster  &  Co,  for  bill  of  stationery 


450 


500 


16 


00 


00 


50 


450 


500 


16 


00 


00 


50 


In  this  case  both  sides  of  each  transaction  are  shown.  In 
the  case  of  the  first  entry,  we  not  only  show  the  debit  of  $450 
to  Smith,  but  we  show  just  as  explicitly  the  credit  of  $450  to 
Cash.  As  the  entry  is  made  as  a  basis  for  recording  two  sides 
of  the  transaction  under  the  proper  headings  in  the  Ledger,  it 
is  apparent  that  we  must  ''post"  these  entries,  Dr.  and  Cr.,  into 
the  Ledger  as  they  are  shown  in  the  Journal. 

But  now  if  we  omit  the  journalizing  of  Cash,  and  enter  each 
transaction  at  once  in  Cash  Account  in  the  Cash-Book,  we  must 
remember  that  that  entry  only  records  one  side  of  the  transac- 


iS 


g.  Business  Engineering. 

tion   and  we  must  "post"  the  entry  into  the  Ledger  in  the  ac- 
count involved  on  the  other  side  of  this  Cash  transaction. 

So  in  the  case  of  the  John  Smith  entry  as  first  shown  m  the 
Cash-Book,  we  must  post  that  cash  credit  entry  as  a  Dr    entry 
in  the  John  Smith  account,  just  as  much  as  if  both  sides  of  the 
transaction  had  been  covered  by  a  Journal  entry. 
In  the  Journal  I  have  written  the  entries  thus: 
John  Smith    Dr.  450-00 

•*  to  Cash  450.00 

This  would  be  just  as  correct  and  self-explanatory  if  written: 
John  Smith  450.00 

■^  Cash  450.00 

"Dr  "  and  "to"  can  be  safely  omitted  because  the  Dr.  and 
Cr.  columns  fully  indicate  that  Smith's  account  is  debited  and 

Cash  Account  is  credited.  . .     t  u 

Also  in  the  Cash-Book  and  Ledger  on  the  Dr.  side  I  have 

made  the  entries: 

To  Henry  Herbert,  To  Cash,  and  To  Journal; 

and  on  the  Cr.  side: 

By  John  Smith,  By  Expense  Account,  By  Journal  and 
By  Cash. 

In  the  John  Smith  Account  "To  Cash"  signifies  that  so  far 
as  that  one  transaction  is  concer,ied,  John  Smith  is  debtor  to  Cash 
Account  or  the  Cashier  for  money  paid  by  Cash  to  John  Smith. 

In  the  Cash  Account  this  same  transaction  is  recorded  By 
John  Smith"-which  signifies  that  Cash  Account  or  the  Cashier 
is  entitled  to  take  credit  "by"  (or  for)  the  amount  paid  to  Smith. 

But  this  is  all  cleariy  shown  without  the  use  of  the  words 
"to"  and   "by"   if  the  double-entry   system  of  bookkeeping    is 

understood.  ,    .  „       j  ..i.  ->  •„  :„ 

Therefore,  while  this  use  of  the  words  "to"  and  by  is  in 
conformity  with  bookkeeping  traditions,  it  is  not  obligatory. 

The  older  practice  in  writing  the  headings  for  Ledger  Ac- 
counts, still  followed  generally  in  Europe  and  much  less  fre- 
quently here,  is  as  follows: 


Lecture  Notes. 


85 


Dr. 


John  Smith. 


Contra. 


Cr. 


signifying  that  entries  on  the  left  are  to  the  debit  of  John  Smith 
while  those  to  the  right  are  opposed  or  against  these  debits  and 
therefore  to  his  credit. 

The  practice  in  the  United  States  is  becoming  more  and 
more  general,  I  believe,  to  simply  write  over  the  centre  of  the 
account,  "John  Smith,"  omitting  not  only  the  word  ''contra," 
but  also  "Dr."  and  "Cr."  as  surplusage. 

It  must  now  be  fully  apparent  that  for  every  debit  item 
carried  into  the  Ledger  there  must  be  a  like  credit  item;  and 
for  every  credit  item  a  like  debit  item.  In  this  connection  we 
must  recollect  that  if  we  do  not  have  a  Cash  Account  in  the 
Ledger  we  must  consider  the  Cash-Book  as  part  of  the  Ledger. 

Considering  the  Ledger  accounts  which  I  have  shown,  we 
find  the  following  Dr.  and  Cr.  balances: 


Expense  Account 

Merchandise  Account 

Cash  Account — as  shown  by  Cash-Book 

Showing  the  Drs.  and  Crs.  balance 


Dr. 
16.50 

33-5Q 

50.00 


Cr. 


50.00 


50.00 


What  is  true  in  the  case  of  these  few  simple  entries  would 
be  true  no  matter  how  many  and  how  complicated  the  entries 
were   provided  the  work  was  correctly  performed. 

It  will  be  noticed  that  in  this  Ledger  balance  I  have  taken 
no  notice  of  Smith's  account  and  Herbert's  account  because  in 
each  case  the  Dr.  and  Cr.  items  balanced  or  cancelled  each  other. 

Analyzing  the  figures  taken  from  the  Ledger,  we  find  that 
by  trading  in  Merchandise  we  have  made  a  gross  profit  of  $50, 
from  which  we  must  deduct  $16.50  for  expenses,  leaving  $33.50 
net  profit,  and  this  net  profit  we  find  as  a  cash  asset  in  Cash 
Account. 


1 


it 


g.  Business  Engineering. 

tion  and  we  must  "post"  the  entry  into  the  Ledger  in  the  ac- 
count involved  on  the  other  side  of  this  Cash  transaction. 

So  in  the  case  of  the  John  Smith  entry  as  first  shown  m  the 
Cash-Book,  we  must  post  that  cash  credit  entry  as  a  Dr.  entry 
in  the  John  Smith  account,  just  as  much  as  if  both  sides  of  the 
transaction  had  been  covered  by  a  Journal  entry. 

In  the  Journal  I  have  written  the  entries  thus: 

John  Smith   Dr.  45ooo 

to  Cash  450-0O 

This  would  be  just  as  correct  and  self-explanatory  if  written: 

John  Smith  450.00 

Cash  450.00 

■•Dr  "  and  "to"  can  be  safely  omitted  because  the  Dr.  and 
Cr.  columns  fully  indicate  that  Smith's  account  is  debited  and 

Cash  Account  is  credited.  ..    r  l 

Also  in  the  Cash-Book  and  Ledger  on  the  Dr.  side  I  have 

made  the  entries: 

To  Henry  Herbert,  To  Cash,  and  To  Journal; 

and  on  the  Cr.  side: 

By  John  Smith,  By  Expense  Account,  By  Journal  and 

By  Cash. 

In  the  John  Smith  Account  "To  Cash"  signifies  that  so  far 
as  that  one  transaction  is  conceryicd,  John  Smith  is  debtor  to  Cash 
Account  or  the  Cashier  for  money  paid  by  Cash  to  John  Smith. 

In  the  Cash  Account  this  same  transaction  is  recorded  By 
John  Smith"-which  signifies  that  Cash  Account  or  the  Cashier 
is  entitled  to  take  credit  "by"  (or  for)  the  amount  paid  to  Smith. 

But  this  is  all  clearly  shown  without  the  use  of  the  words 
"to"  and   "by"  if  the  double-entry  system  of  bookkeeping    is 

understood.  ,    „    „        ■  «l   »  :„  ;_ 

Therefore,  while  this  use  of  the  words  "to"  and  by  is  m 
conformity  with  bookkeeping  traditions,  it  is  not  obligatory. 

The  older  practice  in  writing  the  headings  for  Ledger  Ac- 
counts, still  followed  generally  in  Europe  and  much  less  fre- 
quently here,  is  as  follows: 


Lecture  Notes. 


85 


Dr. 


John  Smith. 


Contra. 


Cr. 


signifying  that  entries  on  the  left  are  to  the  debit  of  John  Smith 
while  those  to  the  right  are  opposed  or  against  these  debits  and 
therefore  to  his  credit. 

The  practice  in  the  United  States  is  becoming  more  and 
more  general,  I  believe,  to  simply  write  over  the  centre  of  the 
account,  "John  Smith,"  omitting  not  only  the  word  "contra," 
but  also  "Dr."  and  "Cr."  as  surplusage. 

It  must  now  be  fully  apparent  that  for  every  debit  item 
carried  into  the  Ledger  there  must  be  a  like  credit  item;  and 
for  every  credit  item  a  Hke  debit  item.  In  this  connection  we 
must  recollect  that  if  we  do  not  have  a  Cash  Account  in  the 
Ledger  we  must  consider  the  Cash-Book  as  part  of  the  Ledger. 

Considering  the  Ledger  accounts  which  I  have  shown,  we 
find  the  following  Dr.  and  Cr.  balances: 


Expense  Account 

Merchandise  Account 

Cash  Account — as  shown  by  Cash-Book 

Showing  the  Drs.  and  Crs.  balance 


Dr. 
16.50 

33-50 
50.00 


Cr. 


50.00 


50.00 


What  is  true  in  the  case  of  these  few  simple  entries  would 
be  true  no  matter  how  many  and  how  complicated  the  entries 
were   provided  the  work  was  correctly  performed. 

It  will  be  noticed  that  in  this  Ledger  balance  I  have  taken 
no  notice  of  Smith's  account  and  Herbert's  account  because  in 
each  case  the  Dr.  and  Cr.  items  balanced  or  cancelled  each  other. 

Analyzing  the  figures  taken  from  the  Ledger,  we  find  that 
by  trading  in  Merchandise  we  have  made  a  gross  profit  of  $50, 
from  which  we  must  deduct  $16.50  for  expenses,  leaving  $33.50 
net  profit,  and  this  net  profit  we  find  as  a  cash  asset  in  Cash 
Account. 


u    1 


'i" 


If 


ACCOUNTING  CONTINUED— GENERAL  NOTES- 

November,  1904. 

Many  authors  of  textbooks  on  bookkeeping  and  accounting 
make  little  effort  to  explain  principles.  Some  set  out  certain 
definite  rules  to  be  memorized  and  expect  that  the  students  when 
they  have  to  decide  some  question  as  to  principle  or  method  can 
select  the  right  rule  and  properly  apply  it.  This  may  work  satis- 
factorily for  bookkeepers,  but  certainly  it  cannot  work  satisfac- 
torily for  accountants,  and  especially  would  it  be  unsatisfactory 
in  the  case  of  men  like  yourselves,  who  will  be  called  upon  in  this 
connection  to  deal  with  principles  only. 

Here  it  is  to  be  noted  that  some  of  the  very  best  textbooks 
as  to  methods  so  neglect  to  teach  principles.  But  it  is  quite  possi- 
ble that  some  of  you  who  might  be  concerned  in  assisting  the 
bookkeeping  department  of  some  concern  to  record  fully  and  cor- 
rectly the  results  of  an  industrial  business  might  find  it  of  distinct 
advantage  to  refer  to  some  of  these  authorities  who  are  sometimes 
particularly  strong  on  good  shortcuts  for  the  reduction  of  clerical 
labor.  If  the  engineer-student  had  previously  obtained  a  fairly 
good  grasp  of  the  principles,  he  might,  working  in  co-operation 
with  a  good  bookkeeper,  be  of  great  assistance  in  utilizing  some  of 
these  shortcut  methods. 

Many  authorities  place  much  stress  upon  the  divisions  of 
accounts.  Anyone  studying  the  subject  of  classification  of  ac- 
counts and  their  main  divisions  will  soon  understand  that  these 
divisions  can  be  made  from  several  different  standpoints.  One 
of  the  divisions  that  can  be  found  in  some  of  the  English  text- 
books is  as  follows : 

Real  Accounts,  dealing  with  actual  property  ; 

Personal  Accounts,  showing  the  record  of  transactions  be- 
tween the  owner  and  the  various  persons  with  whom  he  has 
business  transactions ; 

Nominal  Accounts,  dealing  with  various  forms  of  income 
and  expenditure. 


Lecture  Notes. 


87 


As  this  division  is  studied,  it  will  be  seen  that  there  is  often 
no  essential  difference  between  real  and  personal  accounts.  They 
merge  into  each  other. 

Another  division  is,  Personal,  Real  and  Imaginary  Ac- 
counts ;  the  first  two  covering  the  same  ground  as  shown  in  the 
case  first  cited,  and  the  last  taking  account  of  stock  and  expense 
accounts. 

As  we  come  to  analyze  a  trial  balance  and  the  Journal  entries 
for  closing  the  books,  we  will  see  that  Stock  Account,  while  hav- 
ing to  do  with  the  losses  and  gains  of  the  year,  also  has  to  do 
with  the  question  of  assets  and  liabilities. 

Another  division  is : 

Speculative  Accounts,  having  to  do  with  merchan- 
dise, real  estate,  interest,  expense,  &c., 
and 

Non-Speculative  Accounts,  having  to  do  with  items 
from  which  neither  loss  nor  gain  is  to  be  directly 
expected,  such  as  cash,  bills-payable,  bills-receiva- 
ble, personal  accounts,  &c. 

Here  again  a  modification  can  be  brought  in  through  the  fact 
that  a  loss  is  developed  by  bills-receivable  not  being  paid  at  their 

full  face  value. 

Another  division  is.  Personal  and  Impersonal  Accounts. 

Personal  accounts  are,  as  before  explained,  the  accounts  with 
individuals,  firms  and  companies  with  which  we  do  business  and 
in  connection  with  these  accounts  we  must,  in  making  our  entries, 
always  consider  the  other  party  to  the  account. 

The  impersonal  accounts  are  such  as  Merchandise,  Expense, 
Repairs,  Wages,  Salaries,  &c.,  varying  with  the  scheme  of  classi- 
fication. In  these  accounts  we  have  to  consider  only  the  several 
relationships  between  different  features  of  our  business.  In  the 
case  of  personal  accounts,  cross  entries,  that  is,  the  debiting  of 
one  account  and  the  crediting  of  another,  cannot  be  made  without 
taking  into  account  the  rights  of  the  other  party  to  the  transac- 
tion. In  the  case  of  impersonal  accounts,  such  cross  entries  can 
be  made  without  doing  an  injustice  to  anyone  except  to  the  owner 


(I 


:  ■* 

:l 
.""if 

PI 


I 


88 


Business  Engineering. 


or  owners  of  the  business,  though,  of  course,  the  result  might  be 
even  in  this  case  to  falsify  the  accounts. 

Apart  from  any  arbitrary  division  of  accounts,  the  main  thing 
is  to  continually  bear  in  mind  that,  no  matter  what  the  name  of 
the  account  may  be,  we  must  carefully  discriminate  between  the 
treatment  of  our  accounts  with  respect  to  assets  and  liabilities, 
and  with  respect  to  income  and  expense.  This  I  shall  endeavor 
to  point  out  in  connection  with  the  items  of  depreciation.  If 
depreciation  is  not  cared  for  from  earnings — and  I  am  referring 
to  depreciation  of  plant,  depreciation  of  manufactured  stock,  stock 
in  course  of  manufacture,  or  material  to  be  manufactured  into 
stock — we  are  involving  our  asset  accounts  and  drawing  upon 
our  capital. 

In  this  connection  I  will  state  a  rule  which  it  will  be  well 
for  you  to  memorize  and,  having  memorized  it,  to  test  it  by  the 
application  of  principles  as  we  go  forward  in  our  work,  and  espe- 
cially when  we  come  to  the  analysis  of  a  ledger  balance  sheet. 

Items  on  the 

Left  side  of  Ledger: — 

a.  If  the  amount  will  eventually  be  received,  it  is  an 

asset, 
h.  If  the  amount  will  not  be  received,  it  is  a  loss. 

Right  side  of  Ledger: — 

a.  If  the  amount  will  eventually  have  to  be  paid,  it  is  a 

Uahility. 

b.  If  it  will  not  have  to  be  paid,  it  is  a  gain. 

I  am  not  giving  you  this  rule  with  the  idea  that  it  shall 
be  memorized  to  the  exclusion  of  the  principles  involved,  but 
rather  to  assist  you  in  applying  the  principles  of  accounting  and 
so  making  you  competent  to  read  a  balance  sheet  without  the 
assistance  of  any  memorized  rule. 

The  other  day  I  was  asked  by  a  member  of  this  class,  what 
I  meant  by  a  debit  balance  or  a  credit  balance. 

The  fact  that  such  a  question  was  asked  emphasizes  the 
necessity  for  some  instruction  in  accounting,  if  only  to  enable 
the  engineer  to  understand  the  language  of  business.     It  is  not 


Lecture  Notes. 


89 


only  necessary  that  the  engineer  should  understand  this  lan- 
guage, but  he  should  understand  something  of  the  many  dialects, 
or  certainly  he  should  know  that  there  are  many  different  dia- 
lects; that  is,  many  different  forms  of  expression  though  based 
upon  the  one  mother  tongue. 

A  debtor,  or  debit,  balance  is  the  amount  by  which  the  Dr. 
side  of  the  account  exceeds  the  Cr.  side. 

A  creditor,  or  credit,  balance  is  the  amount  by  which  the 
Cr.  side  of  the  account  exceeds  the  Dr.  side. 

A  question  recently  asked  and  many  similar  experiences 
indicate  that  the  relation  of  Cash  to  the  business  in  which  Cash 
is  concerned  is  at  times  very  puzzling. 

Let  us  consider  for  the  moment  that  the  owner  does  nothing 
for  himself  and  consequently  assume  that  when  a  person  pays 
in  a  sum  of  money  to  the  owner's  business  it  is  not  he  (the 
owner)  who  receives  it,  but  his  cashier  or  his  Cash  Account  that 
receives  it  for  him  and  is  accordingly  his  debtor  for  the  amount 
received.  The  cashier  has  received  the  money  on  behalf  of  his 
employer  and  therefore  is  liable  for  it  and  must  subsequently 
account  for  it.  Until  he  so  accounts  he  is  a  debtor  for  the 
amount  so  received. 

If,  then,  the  cashier  is  made  debtor  for  each  amount  which 
he  receives  on  behalf  of  his  employer,  we  must  make  him  as  far 
as  any  one  transaction  is  concerned  the  employer's  creditor  when 
he  pays  out  money  on  behalf  of  the  employer. 

If  we  balance  up  between  the  Dr.  items  and  the  Cr.  items 
we  may  find  that  the  cashier  is  still  debtor  for  a  balance  of  cash 
on  hand;  but,  nevertheless,  he  has  been  made  creditor  for  each 
item  of  cash  paid  out;  and  it  is  by  balancing  up,  or  placing 
against  each  other,  the  Dr.  and  Cr.  items  that  we  learn  the  final 
result  as  to  whether  there  is  a  Dr.  or  a  Cr.  balance.  If  there 
is  a  Dr.  balance  of  cash  it  indicates  that  the  cashier  being  debtor, 
there  is  a  balance  of  cash  in  his  hands  for  account  of  the  owner. 
If  there  is  a  Cr.  balance  to  Cash  Account,  it  indicates  that  there 
is  a  deficit — there  is  no  cash  on  hand,  but  there  is  money  owing 
to  the  cashier. 

This  relationship  of  Cash  to  the  business  should  be  turned 


^>. 


90 


Business  Engineering. 


over  in  the  mind  and  viewed  from  different  standpoints,  and 
especially  you  should  get  into  the  habit  of  looking  at  the  transac- 
tions as  shown  on  the  books  of  account  from  the  standpoint  of 
the  outsider;  that  is,  you  should  develop  the  capacity  of  cor- 
rectly interpreting  a  statement  of  account  whether  you  look  at 
it  from  the  standpoint  of  the  owner  or  the  standpoint  of  some 
one  doing  business  with  the  owner;  you  should  acquire  the  habit 
of  seeing  the  two  sides  of  each  transaction. 

The  other  day  a  question  was  asked  as  to  what  I  meant  by 
my  reference  to  the  use  of  blanks  and  whether  certain  monthly 
reports  had  been  made  up  on  regular  printed  forms  prepared 
for  that  specific  purpose. 

A  scheme  of  accounting  which  has  to  do  with  a  business 
of  any  magnitude  should  provide  for  a  minimum  of  clerical  labor 
by  including  printed  forms  or  blanks  to  meet  all  cases  which  are 
continually  recurring.  Manifestly,  it  would  be  absurd  to  have 
a  printed  form  or  blank  for  cases  coming  up  only  at  long  inter- 
vals, but  it  would  be  equally  as  absurd  to  write  out  in  each  case 
all  the  words  and  figures  of  a  communication  or  of  a  report  if 
from  time  to  time  such  a  communication  was  varied  only  in 
certain  parts. 

There  are  many  advantages  in  such  a  system  of  printed 
forms  or  blanks;  I  will  mention  four  which  at  once  occur  to  me. 

1.  It  lightens  the  labors  of  the  one  writing  the  communica- 
tion or  report. 

2.  It  serves  to  remind  the  writer  what  information  is  re- 
quired. This  is  particularly  important,  because  the  memory 
cannot  be  safely  relied  upon  in  the  press  of  business. 

3.  It  presents  the  information  to  the  one  for  whom  it  is 
intended  according  to  a  uniform  style  and  practice,  greatly  re- 
ducing his  labors,  especially  by  facilitating  calculations  and  com- 
parisons. 

4.  It  simplifies  and  facilitates  the  operations  of  filing;  that 
is,  the  storing  away  in  definite  form  for  future  reference — one  of 
the  most  important  features  of  the  recording  department  of  a 
large  and  complicated  business. 

Much  saving  of  labor  and  greatly  increased  efficiency  can  be 


Lecture  Notes. 


91 


obtained    through  a  well-developed,    common-sense    system    of 
printed  forms. 

I  can  point  out  a  somewhat  different  direction  in  which 
blank   forms   can   be   used   to   very  great   advantage,   insuring 
greatly  increased  efficiency  in  the  actual  performance  of  duty 
and   finally  leaving  the  records  in  much  more   complete   form 
than  could  otherwise  have  been  provided  for.     I   will  refer  to 
only  one  case,  which,  no  doubt,  is  more  or  less  familiar  to  all 
of  you    but  which-  can  be  used  very  well  here  as  an  illustration. 
Railroads' have  to  do  with  an  immense  amount  of  detail 
in   their  several   departments,  and  especially   in   the   operating 
department.     Blank  forms,  in  almost  infinite  variety,  are  em- 
ployed to  facilitate  prompt  and  accurate  action  and  the  main- 
tenance of  correct  records.     It  can  be  seen  that  especially  in  the 
case  of  instructions  to  be  sent  over  the  wire  it  is  important  that 
they  should  be  conveyed  to  the  one  to  be  directed  with  absolute 
accuracy  and  at  the  minimum  cost  in  time.     The  instructions 
must  be  condensed  as  far  as  possible  without  sacrificing  clear- 
ness and  explicitness. 

Take  the  case,  for  instance,  of  a  wreck.  The  conductor 
must  get  the  news  to  the  proper  officials  without  delay.  If  he 
had  to  write  out  every  word  required  to  make  a  correct  and 
comprehensive  report  he  would  have  to  write  many  minutes 
longer  than  when  using  a  blank  form  and  there  would  thus  be 
an  unnecessary  delay  in  conveying  the  information  to  the  officials 
from  whom  instructions  and  assistance  are  required.  Further- 
more, at  such  a  time  of  mental  stress,  his  memory  could  not  be 
relied  upon,  for  we  find  that  memory  cannot  be  depended  upon 
even  at  times  when  the  conditions  are  normal. 

To  meet  this  a  blank  is  used  by  the  railroads,  which  has 
spaces  for  every  item  of  information  which  past  experience  has 
shown  it  is  necessary  should  be  dispatched  on  such  occasions. 
Opposite  each  of  these  spaces  are  certain  words  which  ask  a 
direct  question  and  in  each  case  the  question  is  indicated  by  a 
cypher,  either  a  letter  or  a  number.  The  conductor  of  the  train 
which  has  been  involved  in  the  accident  proceeds  to  the  nearest 
telegraph  station  on  his  line  and  calls  for  this  blank  form,  "Acci- 


92 


Business  Engineering. 


dent  Report  by  Telegraph."  He  fills  in  the  blank  spaces  as 
required  and,  as  I  have  said,  he  is  thus  reminded  of  each  item 
of  information  which  the  operating  department  will  require  of 
him.  As  soon  as  the  blank  is  filled  up,  the  operator  calls  for 
the  operator  at  the  other  end  of  the  line  and  tells  him  to  provide 
himself  with  "Accident  Report  by  Telegraph"  blank.  The 
operator  at  the  scene  of  the  accident  then  gives  the  cypher  in 
each  case,  followed  by  the  information  which  the  conductor  has 
filled  in  the  space,  and  so  he  goes  down  through  the  whole  blank 
and  promptly  conveys  to  the  operating  department  the  informa- 
tion required  to  meet  the  emergency  which  has  arisen.  The  re- 
ceiving operator,  as  soon  as  he  receives  the  cypher,  turns  to 
that  space  in  his  blank  and  fills  in  all  that  comes  over  the  wire 
until  the  next  cypher  is  signalled. 

It  can  be  readily  seen  that  not  only  does  this  give  the  oppor- 
tunity for  the  operating  department  to  promptly  and  efficiently 
do  everything  possible  to  correct  the  troubles  brought  about  by 
the  accident,  but  a  complete  record  is  furnished  which  can  be 
referred  to  with  confidence  in  case  of  lawsuits  or  other  troubles. 

Furthermore  there  are  other  advantages,  because  such  a 
system,  carried  out  completely,  must  lead  to  great  saving  in  the 
expenditures  for  wages,  and  also  must  lead  to  reductions  in  the 
cost  of  plant:  for,  take  the  case  just  referred  to;  a  single  wire 
would  be  capable  of  conveying  a  much  greater  volume  of 
information  when  so  much  of  that  information  is  reduced  to 
cypher  form.  Of  course,  if  the  use  of  telegraphic  blank  forms 
were  confined  to  reporting  wrecks,  this  item  of  investment  and 
maintenance  would  be  unimportant,  because  the  number  of  acci- 
dent reports  is  limited.  However,  an  immense  number  of  blanks 
are  in  constant  use  for  other  purposes  which  require  the  use  of 
the  telegraph,  namely  the  reporting  of  the  movements  of  cars 
in  trains  and  their  presence  at  stations,  reports  of  conductors 
from  distant  points  showing  the  make-up  of  their  trains,  reports 
of  freight  and  coal  at  various  places  along  the  line,  &c.,  &c. 
Such  reports  as  these  constitute  an  important  percentage  of  the 
telegraphing  each  day. 

But  there  is  a  danger  in  this  connection ;  namely,  the  danger 


Lecture  Notes. 


93 


of  going  to  extremes — a  danger  to  be  always  feared  and  avoided. 
System,  over-developed,  becomes  red  tape  and  that  perhaps  is  to 
be  avoided  almost  as  much  as  the  lack  of  system.  A  proper  ap- 
preciation of  the  value  of  performance  should  go  ahead  of  appre- 
ciation of  the  value  of  properly  recording  the  performance.  The 
keeping  of  the  records  should  not  over-shadov/  the  development 
and  maintenance  of  a  proper  system  for  the  carrying  on  of  the 
business.  The  greatest  efficiency  in  performance  and  the  most 
explicit  and  convenient  forms  of  record  are  of  great  importance 
and  should  go  hand  in  hand.  The  keeping  of  a  reasonably  com- 
plete and  detailed  set  of  records  helps  to  increase  the  profits  from 
a  given  volume  of  business  and  also  helps  to  increase  the  volume 
of  business.  Unless  by  the  records  results  can  be  accurately 
analyzed  it  is  difficult  and  often  impossible  to  eliminate  weak- 
nesses and  uneconomical  items  of  management.  It  is  not  sufficient 
to  know  that  your  business  is  profitable  as  a  whole;  you  should 
know  what  are  the  results,  step  by  step. 

In  connection  with  our  tremendous  development  in  industrial 
lines  there  is  springing  up  a  new  business;  namely,  that  of  the 
industrial  engineer,  or  engineer-accountant,  or  economy  engineer ; 
for  these  and  other  titles  have  been  used.  Two  or  three  of  our 
graduates  are  experts  in  this  line,  and  we  may  well  mention  Mr. 
Frederick  E.  Taylor,  Mr.  Henry  L.  Gantt  and  Mr.  E.  R.  Doug- 
las. Men  to  be  competent  in  this  line  must  be  well  qualified  in  in- 
dustrial matters,  especially  shop  practice,  and  also  qualified  as  ac- 
countants. They  must  be  capable  of  analyzing  the  records  and 
accounts  of  a  business  so  that  they  can  detect  uneconomical  steps 
in  shop  practice  and  management;  and,  having  detected  such 
weaknesses,  they  must  be  competent  to  devise  methods  for  im- 
provement. Sometimes  these  methods  of  improvement  have  to 
do  with  changes  in  the  system  of  management  or  of  control,  and 
sometimes  they  have  to  do  actually  with  changes  in  processes  of 
construction.  It  will,  therefore,  be  seen  that  the  field  is  a  very 
wide  one  and  calls  for  ability  of  a  high  order,  re-enforced  by  wide 
experience. 

Any  system  of  shop  cost  records  should  furnish  the  means 
for  comparing,  month  by  month,  every  item  of  cost.     If  such  an 


If:' 


94 


Business  Engineering. 


inspection  of  the  records  shows  that  during  a  certain  month  a  cer- 
tain item  of  cost  has  been  increased,  at  once  it  is  suggested  that 
an  investigation  should  be  instituted  to  learn  the  cause  or  causes 
of  this  increase.  It  is  only  by  such  continual  exercise  of  intelli- 
gence and  vigilance  that  the  costs  of  a  large  business  can  be  kept 
within  competitive  limits. 

Apart  from  this  question  of  comparison,  there  is  constantly 
an  immense  waste  of  time  and  nerve  force  through  the  lack  of 
well-arranged  records,  this  deficiency  making  it  necessary  to  "dig 
out"  information  which  ought  to  be  at  hand  complete  and  ready 
for  use  as  required.  Not  only  is  time  thus  wasted,  but  busy  men 
have  their  burdens  immensely  increased  by  the  pressure  resting 
upon  them  through  duties  unperformed.  Often  the  hardest  part 
of  a  task  is  getting  the  work  started,  and  this  because  we  have 
not  at  hand  certain  data  which  we  have  previously  developed  but 
which  is  not  now  in  form  for  ready  reference. 

In  this  connection  I  may  well  refer  to  the  advantages  of  the 
card  system.  There  are  concerns  now  that  make  a  specialty  of 
working  up  to  order  card  index  schemes  for  all  special  cases, 
supplying  not  only  the  cards  but  also  the  furniture  required  to 
make  the  scheme  complete.  I  can  remember  the  time  when  a  man 
who  adopted  the  card  system  had  to  work  up  his  own  scheme, 
have  his  own  material  manufactured  and  then  secure  a  result 
far  inferior  to  what  can  now  be  secured  at  small  expense  through 
the  services  of  experts  in  that  line. 

If  a  card  system  is  adopted  for  the  filing  of  data  collected 
outside  the  office,  some  systematic  scheme  must  be  developed 
whereby  these  notes  will  be  from  time  to  time  passed  into  the 
hands  of  those  responsible  for  the  maintenance  of  the  card 
scheme.  One  good  arrangement  which  does  away  with  the  ne- 
cessity of  doing  the  work  twice  is  to  keep  in  your  pocket  a  bunch 
of  cards,  of  convenient  size,  keeping  the  blank  cards  in  one  side 
of  a  wallet,  say,  and  those  which  have  been  written  on  in  the  other 
side.  As  it  becomes  necessary  to  make  a  memorandum  of  data 
obtained,  it  can  be  filled  in  on  one  of  these  cards  and  the  card 
then  put  in  with  those  ready  for  filing.  From  time  to  time  the 
cards  written  on  can  be  passed  over  to  the  filing  clerk  and  another 


Lecture  Notes. 


95 


supply  of  blank  cards  placed  in  the  wallet.  This  arrangement 
can  be  supplemented  by  having  envelopes  of  exactly  the  same 
outside  dimensions  as  the  cards  so  that  when  a  newspaper  clip- 
ping or  the  like  is  secured  it  can  be  filed  in  one  of  these  en- 
velopes, and  as  the  envelopes  are  of  the  same  outside  dimensions 
as  the  cards,  the  pack  can  be  conveniently  manipulated. 


I  shall  now  turn  to  the  consideration  of  depreciation  because 
in  treating  that  part  of  my  subject  I  shall  necessarily  have  to  refer 
to  the  principles  of  accounting.  Having  covered,  as  far  as  time 
will  permit,  the  subject  of  depreciation,  I  shall  return  to  account- 
ing and  especially  the  analysis  of  a  balance  sheet. 


i^i 


REPAIRS  AND  DEPRECIATION* 

November,   1904. 
Because    I  have  found  that  many  engineer-students    find  it 
difficult  to  understand  why  depreciation  of  plant  must  be  made 
good  out  of  the  profits  of  a  business,  I  shall  not  hesitate  to 
frequently  repeat  myself  in  the  following  notes. 

Unless  depreciation  of  plant,  and  depreciation  of  any  prop- 
erty in  which  capital  is  invested,  is  treated  as  a  charge  against 
the  gross  profits,  the  capital  must  necessarily  be  impaired. 
Let  us  take  a  very  simple  case. 

Suppose  a  young  man  without  capital  is  desirous  of  engag- 
ing in  a  business  requiring  capital— say    trading  in  pumps.     A 
friend  offers  to  supply  the  capital  for  an  agreed  upon  interest 
on  his   money.     The   young  man  buys    100  pumps  and   com- 
mences to  make  sales.     As  the  pumps  are  paid  for,  the  money 
is  turned  in  to  the  young  man's  cash  account,  and  as  demands 
are  made  upon  his  private  purse,  he  meets  these  demands  with 
this  money— the  total  proceeds  of  his  sales. 
The  stock  of  pumps  he  does  not  renew. 
It  certainly  requires  no  argument  in  this  case  to  show  that 
he  has  spent  the  profits  from  the  sale  of  the  pumps  and  also 
the  principal  intrusted  to  him  by  his  friend. 

Following  this  line  of  thought,  it  can  be  seen  that  each  time 
a  pump  is  sold  not  only  must  another  pump  be  bought  to  re- 
place the  one  sold,  or  enough  money  be  set  aside  for  this  pur- 
pose when  the  proper  time  comes,  but,  before  claiming  any  profit 
on  the  transaction,  there  must  also  be  set  aside  out  of  the  pro- 
ceeds from  the  sale  enough  to  pay  the  pro  rata  of  the  year's 
expenses  and  of  the  year's  interest  to  be  paid  to  his  friend  for 
the  use  of  capital. 

If  100  pumps,  alike  in  character  and   in  value,  are   sold 
during  the  year,  then  from  the  proceeds  of  each  pump  must  be 


Lecture  Notes. 


97 


deducted  one  one-hundredth  of  the  year's  expense,  one  one-hun- 
dredth of  the  year's  interest  and  the  original  cost  of  the  pump 
before  a  profit  can  be  claimed. 

This  is  such  a  self-evident  proposition  that  it  hardly  seems 
worth  while  to  bring  it  to  the  attention  of  a  class  of  intelligent 
men.    But  it  is  because  this  self-evident  proposition  is  lost  sight 
of  m  accounting  that  so  many  failures  occur  in  the  industrial 
field;  for  it  must  be  apparent   after  a  moment's  thought  that  it 
IS  just  as  necessary  for  the  manufacturer  to  maintain,  out  of 
his  profits,  the  full  value  of  his  plant  as  covered  by  capital  in- 
vestment as  it  is  for  the  tradesman  to  keep  up  his  stock  in  trade. 
You  are  all,  probably,  familiar  with  the  fact  that  in  properly 
conducted  concerns  engaged  in  trade— large  and  small— before 
they  make  up  their  statements  to  cover  the  results  of  the  year's 
busmess,  they  have  to  take  stock,  as  it  is  called;     that  is,^  they 
have  to  go  through  their  stores  and  warehouses,  carefully  list 
everythmg  that  is  on  hand,  determine  whether  it  has  depreciated 
in  value,  and  so  finally  arrive  at  as  correct  as  possible  an  estimate 
of  the  present  value  of  the  stock  in  hand.     If  that  present  value 
proves  to  be  less  than  the  value  as  shown  by  the  books  of 
account,  the  diflference  must  be  charged  up  as  one  of  the  items 
of  loss  for  the  year. 

This  all  goes  to  show  the  constant  care  and  vigilance  that 
must  be  exercised  by  the  accountant  or  bookkeeper  to  insure 
the  complete  separation  of  the  capital,  or  investment,  accounts 
from  the  mcome,  or  expense,  accounts.     And  in  the  case  of  an 
mdustrial   undertaking  this   matter  should   not  be   left  to   the 
accountant  or  bookkeeper  alone,  but  the  responsibility  should 
be  fully  assumed  by  the  manager,  who  probably  would  be  (under 
modern  conditions)  an  engineer.     The  necessity  for  the  manager 
not  delegatmg  this  authority  and  this  responsibility  to  others 
exists  through  the  fact  that  neither  the  accountant  nor  the  book- 
keeper IS  necessarily  qualified  to  decide  many  of  the  points  in- 
volved in  the  distinction  between  extensions  or  betterments  and 
repairs  or  maintenance  of  plant.     Frequently  a  nice  discrimina- 
tion IS  here  necessary.     In  deciding  all  such  questions  the  con- 
servative manager  should  give  the  benefit  of  the  doubt  to  his 


ill 


98 


Business  Engineering. 


investment  accounts  and  charge  all  debatable  items  to  repairs  or 
maintenance. 

Let  us  consider  in  some  detail  how  a  plant  depreciates. 

This  depreciation  can  be  divided  into  three  classes: 

1.  Certain  minor  parts  of  the  plant  break  or  become  so 
inefficient  that  they  have  to  be  repaired  or  replaced  by  new 
parts.  These  repairs  and  replacements  are  paid  for  out  of  in- 
come and  should  be  charged  up  as  part  of  the  expenses  of  the 
year  in  which  they  occur  unless  they  are  made  part  of  an  inclu- 
sive yearly  charge  estimated  to  cover  all  repairs,  renewals  and 
depreciation. 

2.  Certain  parts,  greater  in  value,  break  down  or  become 
inefficient  and  they  have  to  be  repaired  or  replaced  by  new  parts. 
These  repairs  or  replacements  may  be  paid  for  out  of  income 
and  then  charged  up  as  part  of  the  expenses  of  the  year  in  which 
they  occur,  or  the  cost  may  be  distributed  over  a  number  of 
years  according  to  the  number  of  years  the  repaired  or  replaced 
part  has  done  duty;  or  they  can  be  included  in  a  general  item 
as  referred  to  in  connection  with  No.  i. 

3.  But  even  when  all  the  repairs  and  replacements  a9  cov- 
ered in  No.  I  and  No.  2  are  made,  the  plant  as  a  whole  is  not 
maintained  at  its  original  value,  even  though  it  may  be  thus 
from  time  to  time  restored  as  far  as  possible  to  its  original 
efficiency.  In  spite  of  these  efforts  to  maintain  the  plant  at  par 
value,  it  will  gradually  age  and  there  is  beside  the  liability  of 
its  becoming  obsolete. 

In  spite  of  repairs  and  replacements,  the  plant  as  a  whole 
will  finally  need  to  be  renewed.  It  is  not  to  be  understood  by 
this  that  the  whole  plant  will  necessarily  have  to  be  rebuilt  at  one 
time.  But  whether  the  plant  is  renewed  as  a  whole,  or  part  by 
part,  the-  renewals  must  be  made  and  cannot  be  obviated  by  cur- 
rent repairs  or  renewals. 

In  a  general  way  we  speak  of  this  final  renewal  of  plant, 
made  necessary  by  depreciation  or  aging,  as  if  the  plant  were  to 
be  rebuilt  as  a  whole  at  some  time  in  the  future,  but  such  would 
be  an  extraordinary  case.  One  part  of  the  plant  we  can  reason- 
ably expect  to  last  perhaps  for  fifteen  years ;  another  part,  twenty 


Lecture  Notes. 


99 


years;  another  part,  twenty-five  years,  and  so  on.  Often  well 
constructed  masonry  buildings  (part  of  the  plant)  will  last  so 
many  years  that  the  chance  of  their  becoming  obsolete  has  to  be 
considered  rather  than  their  actual  wearing  out  or  aging. 

A  little  thought  must  show  that  if  we  are  to  keep  intact  that 
part  of  our  capital  invested  in  plant,  we  must  pay  from  each 
year's  earnings  for  the  repairs  and  replacements  mentioned  under 
No.  I ;  and  we  must  pay  for  the  more  serious  repairs  and  replace- 
ments mentioned  under  No.  2  either  out  of  the  year's  earnings  in 
which  they  are  made  or  we  must  set  aside  from  each  year's  earn- 
ings an  amount  which  we  estimate  will  be  sufficient  to  cover  the 
year's  share  of  these  deferred  repairs;  and  finally  we  must  set 
aside  out  of  each  year's  earnings  an  amount  sufficient  to  compen- 
sate for  the  final  depreciation  described  under  No.  3. 

Generally  the  current  repairs  and  replacements  (No.  i)  can 
be  made  a  direct  charge  against  the  year's  earnings  without  dis- 
turbing the  uniformity  of  net  profits  which  is  so  desirable. 

As  all  the  items  included  in  these  three  classes  of  expenditure 
on  account  of  maintenance  of  plant  are  to  be  provided  for  out  of 
earnings,  the  yearly  net  profits  will  be  caused  to  vary  widely  if  all 
the  payments  made  for  repairs,  replacements  and  final  renewal  of 
plant  have  to  be  paid  for  out  of  the  earnings  of  any  one  year  in 
which  these  payments  are  made.  It  is  at  once  evident  that  the 
final  renewal  of  plant  (depreciation)  cannot  be  paid  out  of  the 
earnings  of  any  one  year. 

Then  just  so  far  as  is  necessary  to  prevent  wide  fluctuations 
in  our  operating  charges  we  must  provide  in  advance  for  part  at 
least  of  these  expenditures  by  regularly  setting  aside  part  of  our 
earnings  to  meet  the  accrued  and  accruing  liability  due  to  depre- 
ciation of  plant.  If  we  decide  to  meet  that  part  of  the  loss  from 
depreciation  which  shows  itself  in  the  necessity  for  repairs  and 
minor  replacements  from  time  to  time  by  including  the  cost  of 
these  items  in  the  expenses  or  losses  of  the  year  in  which  they 
are  made,  we  still  have  no  provision  for  paying  the  cost  of  the 
deferred  repairs  or  renewals  nor  for  the  final  renewals  or  depre- 
ciation ;  and  these  last  two  are  just  as  real  liabilities  as  the  current 
repairs. 


ICX) 


Business  Engineering. 


It  may  be  well  to  stop  here  a  moment  to  speak  more  directly 
on  this  subject  of  accruing  liability,  something  of  vital  importance 
in  connection  with  the  correct  keeping  of  accounts  and  the  prepa- 
ration of  correct  statements  of  Loss  and  Gain. 

Let  us  suppose  that  a  manufacturing  concern  has  to  pay  a 
large  royalty  on  some  patented  invention  and  that  by  agreement 
the  payments  on  this  royalty  are  to  be  made  semi-annually.    Sup- 
pose there  is  prepared  a  complete  statement  of  the  results  of  each 
month's  operations — that  is,  a  monthly  statement  of  Loss  and 
Gain.    If  in  the  statements  made  for  the  months  in  between  the 
months  in  which  the  royalty  settlements  are  made,  there  is  no 
mention  made  of  these  royalties,  it  is  apparent  that  the  profits  for 
two  months  of  each  year  will  be  called  upon  to  meet  a  large  item 
of  cost  which  should  be  spread  evenly  or  pro  rata  over  the  twelve 
months  of  the  year.    Thus  it  will  be  made  to  appear  that  during 
certain  ten  months  of  the  year  the  operating  cost  has  been  much 
lower  than  during  the  other  two  months.    It  is  quite  possible  that 
a  most  superficial  examination  of  these  monthly  statements  would 
show  the  reason  for  this  wide  variation  in  the  rate  of  profit,  but 
some  calculation  on  the  side  would  still  be  required  to  show  what 
would  be  the  facts  in  connection  with  an  exact  and  fair  compari- 
son.   The  obvious  comment  on  such  imperfect  monthly  statements 
is — "Why  not  make  them  complete  and  self-explanatory  in  them- 
selves?"    This  means,  then,  that  every  statement  of  Loss  and 
Gain  should  include  not  only  the  actual  payments  made  during 
the  period  covered  by  the  report  but  also  every  item  of  accrued 
and  accruing  liability.    It  makes  no  difference  whether  the  actual 
payment  has  been  made  or  not,  if  the  fiscal  period  covered  by  the 
report  is,  under  the  conditions  of  the  business,  required  to  meet 
a  certain  liability,  that  liability  must  be  included  in  the  expense, 
cost  or  loss  items  of  the  period. 

And  the  same  is  true  with  regard  to  the  income  items.  In 
the  royalty  case  cited,  considering  the  other  party  to  the  trans- 
action, the  receipts  are  not  applicable  to  the  month  alone  in  which 
they  are  received  but  they  are  applicable  to  each  month  of  the 

year. 

Now  what  is  important  with  regard  to  the  monthly  state- 


Lecture  Notes. 


lOI 


ments  of  Loss  and  Gain  is  much  more  important  with  regard  to 
half-yearly  and  yearly  statements,  because  on  these  latter  we  base 
our  calculations  as  to  the  division  of  profits — the  paying  of  divi- 
dends. If  a  considerable  item  of  accrued  liability  is  omitted  from 
our  yearly  statement  of  Loss  and  Gain,  to  that  extent  our  profits 
are  shown  greater  than  they  are  in  fact,  and  if  the  total  profit  for 
the  year  is  paid  out  in  dividends,  to  that  extent  the  dividend  is 
paid  from  capital  or  surplus,  but  certainly  not  from  the  earnings 
of  the  period. 

From  this  it  is  to  be  seen  that  in  all  statements  of  Loss  and 
Gain,  and  especially  those  upon  which  dividends  are  declared,  all 
accrued  losses  or  liabilities  and  accrued  gains  or  assets  should  be 
included. 

Following  this  point  a  little  farther,  if  these  accrued  debits 
and  credits  are  to  appear  in  the  statements  of  Loss  and  Gain, 
they  should  first  appear  in  the  regular  books  of  account.  I  spe- 
cifically make  this  point,  unnecessary  as  it  may  appear  to  some 
of  you,  because  too  frequently  I  have  found  that  a  statement  of 
Loss  and  Gain  was  first  made  from  the  regular  books  of  account 
and  then  by  notes  or  comments,  written  or  verbal  or  both,  the 
actual  facts  were  developed.  I  recently  discovered  in  the  case  of 
a  manufacturing  concern  in  which  I  am  pecuniarily  interested 
that  the  statements  of  Loss  and  Gain  prepared  from  the  books  of 
account  were  completely  misleading  and  that  it  was  necessary 
to  supplement  these  statements  of  account  by  information  on  the 
side,  part  of  it  recorded  in  letter-books,  part  of  it  in  pocket  mem- 
oranda and  part  not  recorded  at  all.  Special  discounts  had  been 
allowed  but  not  regularly  recorded;  special  settlements  of  dis- 
puted accounts  had  been  agreed  upon,  but  pending  the  actual  set- 
tlement, no  record  of  the  agreements  had  been  made  on  the  books 
of  account ;  certain  depreciation  in  manufactured  goods  had  been 
definitely  acknowledged,  but  these  goods  were  still  carried  on  the 
books  of  account  at  their  full  original  cost ;  and  so  on.  This  is 
not  an  extraordinary  case.  The  man  responsible  as  General  Man- 
ager was  not  an  inexperienced  man;  on  the  contrary,  he  was  a 
man  of  wide  experience,  well  versed  in  the  principles  of  account- 
ing as  applied  to  industrial  and  commercial  affairs,  and  a  man 


102 


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Business  Engineering. 


who  had  before  always  successfully  managed  the  concerns  in- 
trusted to  his  care. 

His  fault  originated  in  three  causes : 

1.  The  commercial  and  shop  details  of  this  business  were 
quite  different  from  those  of  the  businesses  in  which  he  had  pre- 
viously been  interested. 

2.  He  did  not  surround  himself  with  efficient  assistants,  and 
as  a  result  he  was  over-worked  to  the  point  of  being  threatened 
with  complete  nervous  collapse.  He  was  obliged  to  devote  so 
much  of  his  time  to  certain  details  in  the  shop  and  the  counting- 
room,  that  certain  other  details  were  completely  neglected  and 
there  was  no  time  left  to  maintain  a  general  and  comprehensive 
view  of  the  field. 

3.  As  the  results  from  the  business  failed  to  completely 
verify  his  somewhat  rosy  predictions,  he  did  not  try  very  hard  to 
keep  in  view  and  on  record  his  accrued  and  accruing  liabilities. 
And  this  without  any  deliberate  intention  to  deceive.  It  would 
have  been  difficult  for  him  in  any  case  to  have  maintained  at  all 
times  a  completely  accurate  record  of  the  modifications  of  his 
transactions.  Pressed  upon  as  he  was  by  the  conditions  I  have 
named,  and  being  anxious  not  to  unnecessarily  alarm  those  who 
had  invested  in  his  concern,  naturally  the  reports  failed  to  show 
the  facts. 

And  let  me  warn  you  that  this  case  I  have  cited  is  only  one  of 
many  which  have  come  under  my  personal  observation  and  that 
you  must  be  prepared  to  meet  such  conditions  in  the  ordinary  run 
of  business.  Those  of  you,  especially,  who  may  be  called  upon  to 
report  upon  the  value  of  industrial  properties,  must  appreciate 
that  no  final  estimate  can  be  made  until  there  is  complete  accord 
between  the  engineering  or  technical  side  of  the  report  and  the 
accounting  or  commercial  side  of  the  report ;  and  in  order  to  be 
sure  that  there  is  this  accord  the  engineer  or  technical  expert  must 
at  least  be  able  to  understand,  without  the  assistance  of  an  inter- 
preter, the  accounting  portion  of  the  report.  I  have  been  called 
upon  to  investigate  many  a  case  worse  than  the  one  cited,  and,  I 
am  sorry  to  say  that  in  some  few  cases  it  was  quite  apparent  that 


Lecture  Notes. 


103 


the  faulty  statements  of  Loss  and  Gain  were  the  result  of  deliber- 
ate and  studied  effort  to  deceive. 

Coming  back  to  the  matter  of  accrued  and  accruing  losses 
and  gains,  let  me  give  you  one  example  on  each  side  which  are 
almost  always  to  be  found  involved  in  the  business  of  industrial 
concerns — taxes  and  insurance. 

Taxes  are  frequently  paid  after  or  at  the  end  of  the  time  cov- 
ered by  the  assessment. 

Insurance  is  paid  in  advance. 

Then  in  the  first  case  we  have  an  accruing  liability  and  in 
the  second  case  we  have  an  accru^c?  asset. 

Each  month  we  should  show  in  our  monthly  Loss  and  Gain 
statement,  the  amount  we  estimate  will  have  to  be  paid  for 
taxes  as  applicable  to  that  month.  And  until  the  facts  are 
actually  obtainable  we  must  estimate  as  accurately  as  possible. 

And  the  total  of  the  monthly  charges  for  unpaid  taxes  so 
far  accrued  must  appear  on  the  books  as  an  accrued  liability. 

In  the  case  of  insurance,  the  advance  payment  will  be 
charged  to  "Advance  Insurance  Premiums,"  or  some  account 
with  equivalent  title,  and,  month  by  month,  the  month's  pro 
rata  will  be  charged  to  the  expenses  of  the  month,  and  credited 
to  "Advance  Insurance  Premiums  Account." 

The  original  debit  of  the  total  premium  to  "Advance  In- 
surance Premiums"  will  show  that  amount  as  an  asset — we  have 
invested  a  certain  amount  of  money  in  insurance,  the  insurance 
company  yet  having  to  render  service  therefor. 

As  each  month  we  charge  up  (debit)  the  proper  expense 
account  with  the  month's  pro  rata  of  this  insurance  premium 
(that  is,  take  it  out  of  the  investment  class  of  debit  items,  into 
the  operating  cost,  expense  or  loss  class  of  debit  items),  and 
credit  it  to  "Advance  Insurance  Premiums,"  we  reduce,  as  we 
should,  the  amount  to  the  debit  of  "Advance  Insurance  Premi- 
ums"; that  is,  we  reduce  the  value  of  this  item  of  our  assets. 
The  insurance  company  has  now  rendered  service  for  this 
month's  premium  paid  in  advance  and  hence  at  first  an  asset, 
and  the  month's  pro  rata  of  total  premium  has  become  one  of 
the  month's  items  of  expense. 


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Business  Engineering. 


I  have  thought  this  to  be  a  good  place  to  step  aside  from 
considering  the  subject  of  depreciation,  to  consider  the  more 
general  subject  of  accrued  and  accruing  liabilities  and  assets.  I 
have  purposely  introduced  some  of  the  steps  in  accounting  in- 
volved in  the  recording  of  some  of  these  items  which  have  to  do 
with  the  future  either  as  to  payment  or  liability. 

I  quite  appreciate  that  it  may  be  difficult  for  many  of  you 
to  follow  the  steps  shown  in  this  case  of  insurance  premiums. 
Let  me  encourage  you  to  make  a  real  effort  to  comprehend  the 
points  involved  in  these  entries.  Success  will  mean  that  you 
have  made  a  long  step  toward  an  understanding  of  the  principles 
of  accounting  and  double-entry  bookkeeping. 

Coming  back  now  to  the  subject  of  maintenance  of  plant, 
including  repairs  and  depreciation  (or  if  we  prefer,  current  re- 
newals, deferred  renewals  and  final  renewals)  we  find  that  for 
each  division  of  time  covered  by  a  statement  of  loss  and  gain 
there  should  be  included  in  that  statement  a  pro  rata  charge 
or  pro  rata  charges  to  include  the  several  items  of  maintenance, 
so  that  each  such  division  of  time  will  be  called  upon  to  carry  its 
share  of  the  burden   but  no  more. 

A  moment's  thought  makes  it  apparent  that  even  in  the 
case  of  current  repairs  and  replacements  included  in  Class  No.  i, 
each  item  should  be  spread  uniformly  over  the  time  through 
which  the  part  repaired  or  replaced  has  done  service:  that  is, 
each  of  these  items  should  have  been  treated  in  advance  as  an 
accruing  liability.  This  could  be  done  and  sometimes  is  done, 
by  setting  aside  each  year  out  of  earnings,  a  certain  estimated 
amount  to  meet  this  accruing  liability  as  part  of  one  inclusive 
maintenance  charge,  as  later  to  be  explained  in  connection  with 
Class  No.  2,  deferred  renewals,  and  Class  No.  3,  final  renewals 
or  depreciation. 

But  as  a  rule  the  scheme  for  providing  for  deferred  renewals 
(based,  as  it  is,  largely  on  estimate)  is  much  simplified  if  we  pay 
each  year  out  of  the  year's  earnings  the  ordinary  current  repairs 
and  replacements,  leaving  the  deferred  renewals  and  final  renew- 
als (depreciation)  only  to  be  treated  as  accruing  liabilities. 

The  ordinary  current  repairs  can  generally  be  charged  direct 


Lecture  Notes. 


105 


against  the  year's  business  without  causing  any  radical  fluctua- 
tion in  rate  of  profits,  because,  if  we  eliminate  the  items  to  be 
included  in  the  other  two  classes,  Nos.  i  and  2,  the  direct 
charges  made  on  account  of  current  repairs  will  probably  be 
found  not  to  vary  greatly  in  yearly  totals. 

Coming  now  to  the  items  included  in  Class  No.  2,  the  case 
is  quite  different.  These  repairs  and  renewals  are  much  more 
serious  in  character.  They  are  of  more  occasional  occurrence 
and  to  charge  them  up  to  the  expenses  of  the  one  year  in 
which  they  occur  would  at  times  seriously  detract  from  the 
accuracy  of  the  several  yearly  statements  of  Loss  and  Gain. 

That  is,  the  year  in  which  some  extraordinary  repair  or 
renewal  was  paid  for  would  be  called  upon  in  the  statement  of 
that  year's  Loss  and  Gain  to  bear  the  total  cost  while  the  other 
years  which  had  had  the  benefit  of  the  service  of  this  part  of 
the  plant  would  have  been  relieved  of  all  cost  therefor. 

To  cover  these  items,  then,  it  is  better  to  set  aside  from 
each  year's  earnings  an  amount  which  we  estimate  will  be  suf- 
ficient to  meet  these  deferred  renewals  when  they  come  to  be 
made. 

Coming  to  Class  3,  depreciation  or  final  renewal  of  plant,  you 
are  now  prepared  to  appreciate  the  necessity  of  providing  for  this 
accruing  liability  by  setting  aside  for  the  purpose  a  certain  per 
cent,  of  each  year's  earnings. 

To  cover  this  item  the  first  step  is  to  estimate  the  probable 
life  of  each  part  of  the  plant,  taking  into  consideration  the  class 
and  character  of  plant,  its  design  and  construction,  the  way  in 
which  it  is  operated,  and  especially  whether  it  is  over-worked  or 
not,  whether  it  is  kept  in  good  repair,  and  whether  the  cost  there- 
of is  charged  year  by  year  against  the  profits.  In  arriving  at  an 
estimate  of  ultimate  life  of  plant  we  therefore  have  to  take  into 
consideration  questions  as  to  other  features  of  our  practice  in  ac- 
counting as  well  as  questions  in  connection  with  the  design, 
construction,  operation  and  maintenance  of  the  plant  itself. 

Each  part  of  the  plant  should  be  examined,  and  taking  ad- 
vantage of  our  own  experience  and  that  of  others  and  bearing 
in  mind  the  special  conditions  already   referred  to,  we  should 


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Business  Engineering. 


arrive  at  an  estimate  of  the  final  length  of  life  of  each  of  these 
parts.  Here  is  required  the  trained  judgment  of  the  engineer  or 
technically  trained  manager. 

For  each  of  these  parts  we  must  set  aside  each  year  such  an 
amount  that  with  the  accumulations  of  compound  interest,  there 
will  be  sufficient  to  pay  for  the  renewal  of  this  part  at  the  end  of 
its  estimated  length  of  life. 

It  now  becomes  necessary  to  decide  what  rate  of  compound 
interest  can  safely  be  depended  upon  through  the  term  of  re- 
demption.   Here  comes  in  the  trained  judgment  of  the  banker. 

Next  we  have  to  calculate  what  amount,  compounded  yearly 
at  the  rate  of  interest  we  have  assumed  to  be  procurable  for  the 
full  term,  will  produce  at  the  end  of  that  term  (n  years)  the  value 
of  the  part  of  plant  under  consideration.  When  the  amount  to 
be  set  aside  for  each  part  of  the  plant  is  determined,  we  can  sum 
up  the  several  amounts  so  obtained,  and  dividing  this  total  yearly 
charge  by  the  total  cost  of  the  plant  we  arrive  at  an  average  per 
cent,  of  the  total  cost  of  plant,  which  can  conveniently  be  used  in 
calculating  each  year  the  total  amount  to  be  set  aside  against  de- 
preciation. As  additions  are  made  to  the  plant,  the  depreciation 
of  these  parts  must  also  be  provided  for.  If  these  additions  to 
plant  do  not  disturb  the  balance  of  our  life  table,  we  simply  have 
to  take  this  average  per  cent,  on  the  increased  cost;  otherwise 
we  have  to  establish  a  new  life  table  for  the  parts  added,  using 
the  original  average  per  cent,  on  the  original  cost  of  plant.  These 
two  average  per  cents,  could  be  combined  to  give  us  a  final 
average  per  cent,  up  to  date,  again  to  be  amended  as  necessity 

dictated. 

Finally  we  have  to  so  place  the  record  on  the  books  of  ac- 
count that  the  yearly  statements  of  Loss  and  Gain  will  show  the 
actual  facts  and  that  there  will  be  a  continual  warning  on  the 
Ledger  and  balance  sheets  against  diverting  from  the  prescribed 
purpose  these  amounts  so  set  aside  each  year. 

To  arrive  at  the  per  cent,  of  original  cost  necessary  to  cover 
depreciation  it  is  the  custom  with  many  to  accept  without  question 
the  dictum  of  text  books  and  especially  of  books  on  accounting. 
It  mav  be  of  value  to  consult  such  works,  but  if  so  it  must  be 


Lecture  Notes. 


107 


understood  that  no  general  rules  can  be  established  for  application 
in  all  cases.  The  life  of  a  plant  must  necessarily  depend  upon 
many  special  and  local  conditions  and  especially  it  must  depend 
upon  how  the  plant  was  originally  built  and  how  it  is  being  oper- 
ated and  maintained. 

Consider  two  extreme  cases,  one  where  plants  are  well  de- 
signed, well  constructed  and,  while  being  operated  within  their 
capacity,  are  carefully  kept  in  repair,  and  the  other  where  they 
are  poorly  designed,  poorly  constructed  and,  while  being  operated 
beyond  their  capacity,  are  not  kept  in  repair.  That  the  deprecia- 
tion in  the  value  of  plant  will  be  insignificant  in  the  first  case  as 
compared  with  the  second  case,  and  that  therefore  general  life 
tables  cannot  be  applied  without  detailed  examination  of  the  plant 
in  each  case,  must  be  apparent. 

Here  then,  as  I  have  said,  must  be  brought  into  play  the 
trained  judgment  of  the  manager  who,  preferably,  has  obtained 
his  training  first  in  the  school  of  technology  and  later  in  the  school 
of  experience. 

Each  part  of  the  plant  should  be  carefully  investigated  and 
classified  according  to  its  probable  length  of  life.  The  total  value 
of  the  plant  should  be  split  up  among  these  several  classes.  A 
working  life  having  been  assigned  to  each  of  these  classes,  it 
should  be  assumed  that  at  the  end  of  each  of  these  life  periods  the 
parts  of  the  plant  which  have  been  included  in  this  class  must  be 
renewed. 

I  have  shown  that  deferred  renewals  or  extraordinary  re- 
pairs, as  we  may  regard  them  (Class  No.  2),  should  be  provided 
for  by  building  up  a  fund  by  yearly  payments  from  earnings. 

This  accruing  liability  can  be  provided  for  by  including  it 
with  the  accruing  liabiHty  for  final  renewals  or  depreciation  (Class 
No.  3)  now  under  consideration. 

Then  in  making  up  our  final  life  table  we  assume  that  certain 
minor  parts  have  been  replaced  and  paid  for  under  the  head  of 
current  renewals  or  repairs  (Class  No.  i)  out  of  each  year's 
profits,  but  that  the  deferred  renewals  (Class  No.  2),  and  the  final 
renewals— depreciation— (Class  No.  3)  can  be  grouped  together 


io8 


Business  Engineering. 


so  that  the  one  yearly  deduction  from  earnings  shall  cover  all 
accruing  liability  for  maintenance  of  plant. 

While  it  is  true  that  a  plant  as  a  whole  will  depreciate  in 
value  in  spite  of  all  that  is  done  to  repair  breakages,  renew  in- 
efficient parts,  and  the  like,  it  is  possible  that  some  portions  of 
the  plant  may  be  fully  kept  up  to  original  value  by  current 
repairs  and  renewals. 

To  take  a  very  obvious  case — the  life  table  established  to 
cover  depreciation  might  omit  certain  of  the  parts  which  are  of 
short  life,  it  being  part  of  the  general  scheme  to  renew  these 
parts  out  of  current  earnings.  As  has  been  already  explained, 
this  might  in  some  cases  lead  to  an  uneven  distribution  of  the 
cost  of  repairs,  but  it  should  be  recognized  that  if  such  a  plan 
is  followed  it  will  materially  alter  the  life  table  as  applied  to 
accruing  liabilities  for  maintenance. 

A  case  in  point  might  be  the  mains  of  a  gas  company,  which 
are  usually  composed  of  cast  iron  pipe.  In  many  soils  cast 
iron  pipe  will  not  deteriorate  rapidly,  even  if  it  will  deteriorate 
at  all  from  the  outside.  These  cast  iron  pipes  will  take  on  a 
scale  of  oxide  of  iron  which  will  protect  them  from  further 
oxidation.  The  inside  of  the  pipe  is  not  subject  to  oxidation, 
but  to  the  contrary  the  inner  surfaces  are  rather  protected  by 
the  hydro-carbons  in  the  gas.  I  have  myself  carefully  examined 
pipes  which  have  been  down  fifty  years  and,  as  far  as  the  quality 
of  the  iron  was  concerned,  there  seemed  to  be  no  impairment. 
Of  course,  it  is  quite  possible  that  disturbances  of  the  bed  on 
which  the  pipes  lie,  due  to  the  digging  up  of  the  streets  for 
sewers  and  the  like,  might  greatly  destroy  the  value  of  the 
pipes;  but  this  in  the  case  of  a  well-conducted  company  might 
rather  indicate  that  there  was  no  necessity  for  including  a  yearly 
charge  for  depreciation  because  these  troubles  would  have  been 
cared  for  from  time  to  time  and  the  repairs  would  have  been 
paid  for  out  of  the  current  earnings.  In  such  a  case  it  is  quite 
possible  that  at  the  end  of  five,  ten,  fifteen,  twenty  or  twenty- 
five  years  the  main  system  in  general  might  be  in  more  effective 
condition  for  economical  operation— that  is,  the  delivery  of  gas 
without  leakage — than  when  first  laid.     The  weaknesses,  as  they 


Lecture  Notes. 


109 


made  themselves  evident,  might  have  been  corrected  and  the 
cost  paid  for  out  of  current  earnings.  This  serves  again  to 
point  out  that  in  making  up  a  life  table  it  is  necessary  to  examine 
not  only  the  conditions  as  to  the  plant  itself,  but  the  conditions 
as  to  the  accounting  methods  followed. 

It  may  be  well  to  here  point  out  that  the  case  of  cast  iron 
pipe  as  used  for  gas  is  very  different  from  the  case  of  the  same 
pipe  used  for  water.  In  the  latter  case  it  is  the  practice  to  coat 
the  pipes  inside  and  out  with  tar  and  I  have  found  that  some 
engineers  are  of  the  opinion  that  the  coating  is  necessary  or  an 
advantage  even  on  the  outside  of  the  pipe.  The  real  advantage, 
however,  is  that  it  prevents  oxidation  of  the  inside  of  the  pipe, 
for  the  water  passing  through  carries  with  it  more  or  less  oxy- 
gen from  the  air;  oxidation  results;  the  pipe  is  reduced  in 
thickness,  because  the  scale  as  formed  is  carried  forward  by  the 
push  of  the  water,  thus  depreciating  the  pipe  and  developing  a 
continuing  trouble  in  connection  with  the  operation  of  the  plant, 
due  to  the  scale  being  deposited  in  valve  seats  and  the  like. 

So  in  the  case  of  water  mains  we  are  warranted  in  expect- 
ing less  depreciation  if  they  were  coated  before  they  were  laid. 
But  with  gas  mains  the  case  would  be  just  the  opposite,  for  the 
tar  coating  is  a  distinct  disadvantage.  Not  only  is  it  not  needed 
for  protection,  as  explained,  but  the  tar  deposited  on  the  outside 
of  the  spigot  ends  and  the  inside  of  the  bells  is  attacked  and 
dissolved  by  the  hydrocarbons  of  the  gas  and  so  these  two  tar 
films  which  are  included  in  the  caulked  joint  are  carried  away 
and  leakage  results.  So  definite  is  this  fault  that  experienced 
gas  engineers  only  accept  tar-coated  cast  iron  pipe  when  they 
find  it  impossible  to  obtain  the  uncoated  pipe  to  meet  an  imme- 
diate demand,  and  in  these  cases  they  are  careful  to  burn  off  all 
the  tar  from  the  spigots  and  bells. 

The  conditions  in  regard  to  service  pipes  (which  are  almost 
always  of  wrought  iron)  are  quite  different.  In  most  soils,  un- 
less the  pipe  is  thoroughly  protected  by  some  applied  coating, 
the  wrought  iron  rapidly  oxidizes  and  the  pipe  steadily  deteri- 
orates. Here  again,  however,  we  have  to  take  into  account 
the    methods    locally    pursued    for    the    maintenance    of    this 


no 


Business  Engineering. 


Lecture  Notes. 


Ill 


Hi 


ht. 


part  of  the  plant  and  the  methods  pursued  in  the  account- 
ing department.  If,  year  by  year,  the  services  are  renewed  as 
they  are  found  to  be  defective  and  if,  learning  from  experience, 
the  management  makes  its  renewals  with  coated  pipe  instead  of 
the  ordinary  black  pipe  and  the  cost  therefor  is  charged  up 
as  one  of  the  items  of  the  year's  expenses,  as  far  as  this  item  is 
concerned  the  plant  may  appreciate  in  value  rather  than  depre- 
ciate. 

Again,  certain  parts  of  the  plant  under  investigation  might 
be  found  to  need  renewal  say,  on  the  average,  every  five  years, 
and  it  might  be  that  some  of  these  parts  would  need  renewal 
one  year  and  some  another,  so  that  the  cost  of  renewal  would 
be  distributed  not  too  unevenly  over  the  five  years  life  period. 
If  now  these  renewals  are  charged  up  to  the  repairs  of  the  year 
in  which  they  are  made,  they  should  not  be  considered  in  the 
estimate  upon  which  the  depreciation  life  table  is  made  up. 
Here,  then,  is  an  item  which  because  of  its  short  life,  might 
appear  to  be  a  most  important  element  of  depreciation  but 
which  upon  further  consideration  we  see  is  properly  disregarded 
because  it  has  already  been  cared  for  in  repairs  or  current 
renewals. 

This  all  goes  to  show  that  it  is  the  evidence  of  ignorance 
or  inexperience  for  anyone  to  stand  off  at  a  distance,  without 
examining  the  plant  and  system  of  accounting,  and  attempt  to 
apply  some  general  rules  to  determine  the  reduction  in  plant 
value  due  to  depreciation  in  a  special  case. 

The  first  thing  is  to  have  a  clear  conception  of  the  premises 
upon  which  our  life  estimate  is  based  and  then  to  place  on  record 
all  the  facts  in  this  connection  that  we  may  not  later  amend  our 
figures— perhaps  under  pressure  to  make  a  favorable  statement  of 
earnings— through  misapprehension  as  to  the  original  basis  of  our 
estimate.  All  the  records  in  our  books  of  account  should  be  self- 
explanatory  and  so  sufficient  for  the  guidance  of  those  who  are  to 
come  after  us,  and  especially  so  in  the  case  under  consideration 
where  the  man  who  establishes  the  original  basis  for  the  yearly 
charge  on  account  of  depreciation  is  likely  to  be  in  his  grave 
before  the  expiration  of  the  life  period. 


We  will  assume  that  we  have  a  plant  which  has  cost  $500,000 
and  that  we  determine  that : 

Part  "A"  will  be  good  for  ten  years  and  its 

cost  is $25,000 

Part  "B"  will  be  good  for  fifteen  years  and 

its  cost  is 50,000 

Part  "C"  will  be  good  for  twenty-five  years  and 

its  cost  is 100,000 

Part  "D"  will  be  good  for  thirty-five  years  and 

its  cost  is 1 50,000 

Part  "E"  will  be  good  for  fifty  years  and  its 

cost  is 175,000 

Total   $500,000 

Now,  so  far,  we  have  been  using  the  trained  judgment  of  the 
practical  operator  of  the  plant.  Now  we  have  a  very  different 
proposition.  How  shall  we  determine  the  amount  of  money  to  be 
set  aside  to  take  care  of  this  depreciation ;  in  other  words,  to  re- 
new these  several  parts  of  the  plant  as  they  become  useless  or 
inefficient  ? 

We  will  assume  that  we  will  provide  for  this  case  by  actually 
taking  out  of  our  profits  each  year  a  certain  amount  of  cash  and 
setting  it  aside  to  accumulate  at  compound  interest. 

We  will  now  first  have  to  estimate  the  rate  of  interest  that 
can  safely  be  reckoned  on  through  a  series  of  years  (viz.,  through 
the  life  of  the  plant)  and  here  we  require  the  trained  judgment  of 
the  banker. 

Having  assumed  a  rate  of  interest,  we  still  have  to  determine 
the  amount  which,  at  this  rate  of  interest,  compounded  yearly,  will 
give  us  the  amount  required.  It  may  be  the  interest  could  be 
compounded  half-yearly,  but  my  assumption  makes  the  proposi- 
tion simpler,  while  the  principle  is  the  same.  This  is  in  the  line 
of  work  performed  by  the  insurance  actuary,  but,  of  course,  there 
is  no  difficulty  in  the  engineer  learning  for  himself  every  step  of 
the  process. 


?  1 


>  f 


r 

I; 


P 

It' 


112 


Business  Engineering. 


If  we  set  aside  each  year  for  n  years  a  constant  number  of 
dollars  to  accumulate  at  compound  interest,  we  have  a  geometrical 
progression.  Let  me  remind  you  that  quantities  are  in  geometrical 
progression  when  they  increase  or  decrease  by  a  constant  factor. 

If  A  is  the  first  term,  r  the  common  factor  or  ratio,  n  the 
number  of  terms  and  S  the  sum  of  n  terms  in  the  geometrical 
progression,  we  have 


S  — A 


r — 1 


In  our  problem  r,  the  ratio  or  factor,  is  i  plus  the  fraction  in- 
dicated by  the  rate  of  interest  assumed  as  obtainable  throughout 
the  life  of  the  plant.  Let  us  assume  the  rate  of  4  per  cent.,  then 
r=i.04;  that  is,  the  constant  amounts  previously  set  aside  will 
each  year  be  multiplied  by  1.04. 

In  the  equation  just  given,  A  is  spoken  of  as  the  first  term 
of  the  geometrical  progression;  in  our  case  A  will  be  the  last 
term,  because  the  last  payment  of  A  will  not  have  accumulated 
any  interest,  whereas  the  first  payment  of  A   which  has  been  ac- 
cumulating 4  per  cent,  compound  interest   will  have  been  multi- 
plied at  the  end  of  the  second  year  by  1.04,  the  next  year  the 
principal  A -f  the  interest  will  have  been  multiplied  by  1.04  and 
so  on  to  the  end  of  life  of  plant.     That  is,  each  of  the  constant 
annual  payments  from  earnings  will  have  accumulated  at  4  per 
cent,  compound  interest.    Thus  at  the  end  of  the  life  of  the  plant 
we  shall  have  a  series  of  annual  payments   each  with  its  interest 
accumulation,  constituting  a  geometrical  progression  which  de- 
creases by  a  constant  factor  or  ratio,  which  ratio  for  4  per  cent, 
compound  interest  will  be  1.04.    Considering  the  yearly  payments 
(A)  separately,  the  first  payment.  A,  will  be  made  at  the  end  of 
the  first  year;  at  the  end  of  the  second  year  this  will  have  in- 
creased by  interest  to  Ar;  at  the  end  of  the  third  year  to  Ar  ;  at 
the  end  of  the  fourth  year  to  Ar',  and  at  the  end  of  the  nth  year 
(the  Hfe  of  the  plant)  to  Ar»-\  Therefore,  the  second  payment,  at 
the  end  of  n  years  (with  one  year's  interest  less)    will  have  in- 
creased to  Ar  "- ';  the  third  payment  to  Ar°-  ";  the  third  payment 
from  the  end  to  Ar' ;  the  next  to  the  end  to  Ar ;  and  the  last  will  be 
A,  for  it  will  have  had  no  opportunity  to  accumulate  any  interest. 


Lecture  Notes. 


113 


Then  instead  of  an  increasing  geometrical  progression, 

A  +  Ar  4-  Ar 2  +  Ar^  + +  Ar"-8  +  Ar°-2  +  Ar  »-i 

we  will  have 

Ar-i  +  Arn-2  +  Af»-8+ +  Ar3 -f  Ar2  +  Ar  +  A. 

This  only  changes  the  order  of  the  terms,  and  in  no  way  modifies 
the  calculation. 

In  our  problem,  having  the  values  of  S,  r  and  n,  we  have 
to  solve  for  A,  the  amount  to  be  set  aside  each  year. 

If  for  S  we  use  the  total  value  of  plant  for  each  class  of 
plant,  n  would  be  the  assumed  life  for  that  class.  But  we  can 
make  the  equation  of  more  general  application  by  solving  for 
the  per  cent,  of  value  of  plant  required  to  be  set  aside,  and  this 
can  be  done  by  taking  S  as  100  or  i  instead  of  the  full  value  of 
the  portion  of  plant  under  consideration. 

In  either  case,  as  I  have  said,  A  is  our  unknown  quantity. 

The  equation 


gives  us 


A(r°  —  i) 
r  —  I 


S- 


r—  I 


r"  —  I 


With  this  equation  let  us  determine  the  amount  to  be  set 
aside  each  year  at  4  per  cent,  compound  interest  to  redeem  the 
value  of  Part  "A"  of  plant,  viz.,  $25,000,  in  10  years.     Then 


25.000 


1.04  —  I 


1.04 


10 


It  is  not  necessary  to  employ  logarithms  to  obtain  the  loth 
power  of  1.04,  as  you  will  probably  have  at  hand  Kent's  Pocket- 
book,  and  on  page  14  you  will  find  a  compound  interest  table  as 
generally  to  be  found  in  arithmetic  textbooks.  These  tables 
can  be  used  to  determine  the  value  of  n  as  they  give  the  results 
from  compounding  $1  at  various  rates  of  interest  through  a 
series  of  years,  which  means  that  these  are  tables  of  powers.  For 
instance,  at  4  per  cent.,the  first  year  shows  1.04  (=  i  X  1.04);  sec- 


114 


Business  Engineering. 


ond  year,  1.0816  (=  1.04  X  1.04)  ;  third  year,  1. 124864  (=  1.0816 
X  1.04)  ;  and  ten  years,  1.480244.    Then 


A  —  25,000 


1.04  —  I 


1,000 


2082. 


1.480244  —  I       0.480244 

Then  to  redeem  $25,000  at  the  end  of  10  years  we  must 
invest  annually  $2,082,  if  the  interest  to  be  obtained  is  4  per 
cent,  compounded  annually. 

But  our  determination  will  be  capable  of  more  general 
application  if  we  take  S  as  i  or  100  and  so  determine  how  much 
we  must  set  aside  each  year  at  4  per  cent,  compound  interest 
to  redeem  $1  or  $100.  In  the  first  of  these  two  cases  our  answer 
will  be  a  fraction  which,  multiplied  into  the  amount  to  be 
redeemed,  will  give  the  amount  to  be  set  aside  each  year.  In 
the  second  case,  we  get  as  an  answer  the  per  cent,  of  the  amount 
to  be  redeemed  to  be  set  aside  each  year  which,  multiplied  into 
this  amount  to  be  redeemed,  and  divided  by  100,  gives  the  annual 
payment. 

To  make  sure  that  the  use  of  the  equation  given  is  thor- 
oughly understood  and  for  reasons  to  follow,  let  us  solve  for  A, 
using  I  for  the  value  of  S  and  then  using  100. 


A  — s 


r—  I 

r"  —  I 


—  I 


1.04 


—       -04 


.08329. 


1.0410  —  1         .480244 

25,000  X  .08329  =  $2,082,  the  amount  to  be  set  aside  each 
year  as  previously  determined  in  solving  direct  for  the  $25,000, 
the  total  amount  to  be  redeemed 

Again, 

r—i  1.04  — I 


A  — S 


r"  —  I 


100 


1.04 


10 


8.329. 


or  8.329  per  cent,  of  the  amount  to  be  redeemed. 

(25,000  X  8.329)  ^  100  =  $2,082,   as   before   determined. 

An  additional  reason  for  my  taking  the  trouble  to  carry  out 
in  detail  the  several  ways  of  using  our  equation  to  solve  the 
problem  in  hand  is  because  I  have  frequently  noticed  the  troubles 
occasioned  by  lack  of  uniformity  in  the  methods  followed  to 
indicate  per  cent.     A  not  uncommon  error,  even  among  book- 


Lecture  Notes. 


115 


keepers,  is  the  filling  in  of  the  items  in  a  column  calling  for 
rates  per  cent,  with  fractions,  when  a  fraction  is  not  called  for. 
For  mstance,  a  column  will  perhaps  be  headed  "Per  cent."  and 
in  that  column  may  appear  an  item  .02,  which  is  intended  to 
mean  2  %,  but  which,  in  view  of  the  heading  really  means  two- 
hundredths  of  one  per  cent.  Those  who  know  better  when  they 
stop  long  enough  to  think  forget  that  "two  per  hundred"  can  be 
written 

2  per  cent.  (-  2%),  or  .02,  or-^.  but  not  as  .02  per  cent.  or-±  per  cent. 

But  particularly  I  have  gone  into  this  detail  because  I  now 
wish  to  refer  you  to  certain  tables  which  can  be  used  directly 
for  the  several  values  of  A.  I  wish  you  to  understand  how  these 
tables  are  derived  and  I  also  wish  you  to  understand  why  the 
two  tables  to  which  I  shall  specifically  refer  can  be  both  used 
to  obtain  the  same  result,  except  for  some  few  minor  inac- 
curacies in  one  of  them. 

In  Kent's  Handbook,  page  16,  you  will  find  a  table  showing 
the  annuity  required  to  redeem  $1,000  for  one,  two,  three,  four, 
&c.  and  certain  other  years  up  to  100,  at  several  rates  of  interest 
compounded  annually.  In  using  this  table  we  find  the  figure  wJ 
are  looking  for  at  the  intersection  of  the  vertical  column  which 
indicates  the  rate  of  interest  and  the  horizontal  column  which 
indicates  the  life  of  the  part  of  plant  we  are  considering.  When 
this  figure  is  found,  it  is  for  the  amount  required  each  year  in- 
vested at  4  per  cent,  compound  interest  to  redeem  $1,000  so  if 
we  prefer  to  state  the  result  in  per  cent.,  we  move  the  decimal 
point  one  place  to  the  left. 

In  Matheson's  "Depreciation  of  Factories"  (second  edition) 
we  find  on  pages  67  and  68,  "Table  3;  Sinking  Fund;  Annual  In- 
vestment to  Produce  One  Pound  in  a  Term  of  Years." 

Notice  how  self-explanatory  is  this  title. 

This  is  a  more  extended  form  of  the  same  table  as  given  in 
Kent,  except  that  it  is  calculated  for  the  redemption  of  £1  instead 
of  $1,000.  In  Matheson's  table  the  results  are  stated  as  fractions 
and  therefore  can  be  used  direct  as  multipliers.    The  results  are 


■f  1 


ii6 


Business  Engineering. 


stated  as  fractions  indicating  per  cent,  without  the  use  of  the 
words  per  cent,  or  the  sign  %. 

At  my  request,  the  calculations  in  these  tables  were  checked 
by  a  member  of  the  Class  of  1904  and  he  found  that  Kent's  table 
is  correct  and  Matheson's  correct  except  in  the  two  following 
cases : 

Vertical  column  3  %,  horizontal  column  3  years,  Matheson 
gives  .3225 ;  this  should  be  .3236. 

Vertical  column  4  %,  and  horizontal  column  15  years,  Mathe- 
son gives  .0492;  this  should  be  .04994. 

Let  us  now  calculate  out  our  plant  life  table,  using  both  the 
Kent  and  Matheson  tables. 


1 

2 

3 

4 

5 

6 

7 

8 

Part 

of 

Plant. 

Est  - 
mated 

Life 

in 

Years. 

Value 

of 
Plant 

DOLLARS. 

Kent's 
Table. 

Requir'd 

to 

Redeem 

$1,000. 

Mathe- 
son's 
Table. 

Requir'd 

to 
Redeem 

Direct 
Multiplier 
Derived 
Prom 
Kent's 
Table  or 
Taken  Di- 
rect From 
Mathe- 
son's. 

Per 

Cent. 
Derived 

From 
Either 
Table. 

Amount  to 

Be  Set 
Aside  Each 
Year  to 
Cover  De- 
preciation 
(Redemp- 
tion) of 
Each  Part 
of  Plant. 

DOLLARS. 

A 
B 
C 
D 

E 

10 
15 
25 
35 
50 

25,000 

50,000 

100,000 

150,000 

175,000 

83.29 
49.94 
24.01 
13.58 
6.55 

.06329 
.04994 
.02401 
.01358 
.00f)55 

.08329 
.04994 
.02401 
.01358 
.00655 

8.329 
4.994 
2.401 
1.358 
0.655 

2,082.25 
2,497.00 
2,401.00 
2,087.00 
1,146.25 

$500,000 

$10,163.50 

It  should  be  quite  unnecessary  to  point  out  that  the  amount 
in  column  8  can  be  obtained  by  multiplying  the  number  of  thou- 
sands as  shown  in  column  3  by  the  figure  shown  in  column  4; 
or  by  multiplying  the  full  amount  shown  in  column  3  by  the 
figures  shown  in  both  columns  5  and  6;  or  by  multiplying  the 
number  of  hundreds  as  shown  in  column  3  by  the  figure  shown 
in  column  7. 

If  we  have  not  the  Kent,  or  Matheson  or  equivalent    table 


Lecture  Notes. 


117 


by  us,  then  each  of  the  amounts  in  column  8  can  be  calculated 
from 

r°— I 

In  this  case  tables  of  logarithms  would  be  required,  or  the 
powers  of  1.04  would  have  to  be  calculated. 

Suppose  we  prefer  the  result  in  the  form  shown  in  column  7 ; 
namely,  per  cent. 


For  A  we  have,  as  before  shown,   A  —  100  -ii^i-llJ 

1.0410  _ 

For  B  we  have,  as  before  shown,   A  —  100    ^•^^~ 


For  C  we  have,  as  before  shown,   A  —  100   'l^^^" 
For  D  we  have,  as  before  shown,  A 


100 


1.0425  _ 
1.04  — 


1.04 


85  


—  8.329. 

_      4' 

.800944 

—      4- 
1.6658  " 

_      4. 


I       2.9460 


=  4.994. 
2.401. 

1.358. 


For  B  we  have,  as  before  shown,  A  —  100    ^-^^  —  ^    . 4^ ^  ^.. 

1.0450  _  I      61064        ^     ^' 

agreeing  with  the  figures  as  obtained  from  the  Kent  and  Mathe- 
son tables. 

It  is  well  to  here  draw  attention  to  a  mistake  which  is  some- 
times made  in  estimating  the  average  life  of  a  plant.  Take  the 
case  we  have  already  considered  and  the  calculation  might  be 
as  follows : 


Years. 
10 

35 
50 


X 
X 
X 
X 
X 


Value  of 
Parts  in 
Dollars. 

25,000 

50,000 

100,000 

150,000 

175^000 


250,000 

750,000 

2,500,000 

5,250,000 

8,750,000 


i7»5oo,ooo 
17,500,000  ^  500,000  =  35  years  average  life. 

But  if  the  average  life  of  the  plant  were  as  long  as  35 
years,  we  find  by  referring  to  the  Kent  or  Matheson  tables  that  it 
would  require  only  1.358%  of  the  total  value  of  the  plant  (viz., 


\ 


ii8 


Business  Engineering. 


$6,790),  set  aside  each  year  at  4  %,  compound  interest,  to  rebuild 
the  plant  at  the  end  of  its  life. 

But  taking  each  part  in  detail  we  have  found  that  to  renew 
each  part  as  its  life  expires  will  require  an  annual  payment  to  the 
sinking  fund  of  $10,163.50,  which  is  10,163.50^500,000 
=  2.03  %  of  the  total  value  of  the  plant. 

By  referring  to  Matheson's  Sinking  Fund  table  already  re- 
ferred to  we  find  that  2.03  is  almost  exactly  the  per  cent,  required 
to  redeem  the  cost  of  the  plant  in  twenty-eight  years. 

So  we  see  the  "average  life"  method  of  calculation  is  abso- 
lutely misleading. 

To  emphasize  this  point,  let  us  make  some  calculations  to 
learn  the  result  of  assuming  an  average  life  of  35  years  and  so 
setting  aside  each  year  only  $6,790,=  1.358%  of  total  value  of 
plant,  instead  of  $10,163.50,  =  2.03  7c  of  total  value  of  plant. 

At  the  end  of  the  first  ten  years  we  will  have  accumulated 


S  — A 


r» —  I 


6790 


1.04 


10 


1.04  —  I 


6790 


•4302 
.04 


$81,513-95. 


Withdrawing  $25,000  required  to  renew  Part  "A,"  we  have  left 
81,513-95  —  25,000  =  56,513.95,  say  $56,514.  This  will  accumu- 
late by  the  end  of  the  next  5  years  (15  years  in  all),  when  Part 
'*B"  has  to  be  provided  for,  56,514  X  1.2166  (=$1.  compounded 
5  years  at  4  %)  =$68,755,  and  the  additional  yearly  payments 
to  sinking  fund  will  accumulate  to 


6790 


1.04= 


1.04  —  I 


6790 


1. 2166  —  I 
1.04  —  I 


36,768. 


The  total  accumulations  will  be  68,755  +  36,768  =  $105,523. 
Withdrawing  the  $50,000  required  to  renew  Part  "B,"  we  have 
a  balance  left,  105,523  —  50,000  =  $55,523. 

At  the  end  of  the  next  5  years  (20  years  in  all)  we  have  to 
provide  for  a  second  renewal  of  Part  "A." 

During  this  time  the  balance  of  $55,523  will  accumulate  to 
(55,523  X  1.2166=)  $67,549;  and  during  this  time  the  additional 
annual  payments  will  accumulate  to  $36,768,  as  before  calculated. 
The  total  accumulations  will  be  67,549  +  36,768  =  $104,317. 


Lecture  Notes. 


119 


Withdrawing  the  $25,000  to  again  renew  Part  "A,"  we  have 
a  balance  left    104,317  — 25,000  =  $79,317. 

At  the  end  of  the  next  5  years  (25  years  in  all)  we  have  to 
provide  for  the  renewal  of  Part  "C"— $100,000. 

During  this  time  the  $79,317  will  accumulate  to  (79,317  X 
1.2166=)  $96,497;  and  during  this  time  the  additional  annual 
payments  will  accumulate  to  $36,768,  as  before  calculated.  The 
total  accumulations  will  be  96,497  +  36,768  =  $133,265. 

Withdrawing  the  $100,000  to  renew  Part  "C,"  we  have  a 
balance  left  of  $33,265. 

At  the  end  of  the  next  5  years  (30  years  in  all)  we  have  to 
renew  Part  "A"  for  the  third  time,  $25,000,  and  Part  "B"  for  the 
second  time,  $50,000,  making  $75,000  in  all. 

During  this  time  the  balance  of  $33,265  will  accumulate  to 
(33,265  X  1.2166=)  $40,470;  and  the  additional  annual  payments 
will  amount  to  $36,768,  making  the  total  accumulations  $77,238. 

Withdrawing  $75,000  for  renewing  Part  "A"  for  the  third 
time  and  Part  ''B"  for  the  second  time,  we  have  a  balance  left 
of  only  (77,238  —  75,000  =  )  $2,2sS. 

At  the  end  of  the  next  5  years  (35  years  in  all)  we  have  tc 
renew  Part  "D"  for  the  first  time,  requiring  $150,000;  and  dur- 
ing this  time  the  balance  amounting  to  $2,238  will  accumulate  to 
(2,238  X  1.2166=)  $2,722. 

Adding  the  accumulations  of  the  annual  payments  for  5 
years,  $36,768,  we  have  a  total  accumulation  of  (2,722  -f-  36  378  =) 
$39,490. 

So  after  renewing  Part  ''D,"  $150,000,  we  are  in  debt  (icjo- 
000  —  39,490=)  $110,510. 

Thus  at  the  end  of  the  35  years,  which  was  assumed  as 
the  average  life  of  plant,  we  are  in  debt  for  depreciation  renew- 
als $110,510,  and  falling  behind  all  the  time,  as  will  be  seen. 

At  the  end  of  the  next  5  years  (40  years  in  all)  we  have 
to  renew  Part  "A"  for  the  fourth  time,  requiring  $25,000. 

The  debt  of  $110,510  will  during  this  time  increase  to 
(110,510  X  1.2166=)  $134,446.    The  total  to  be  provided  for  is, 


X: 


i 


ih 


I 


I 


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Business  Engineering. 


therefore,  (134,446  +  25,000  =)  $159,446.  Against  this  we  have 
only  the  yearly  accumulations,  amounting  to  $36,768.  So  now 
our  debt  is  increased  to  (159,446  —  36,768=)  $122,678. 

At  the  end  of  the  next  5  years  (45  years  in  all)  Part  "B" 
has  to  be  renewed  for  the  third  time,  requiring  $50,000. 

By  this  time  our  debt  will  be  increased  to  (122,678 
X  1.2166=)  $149,250.  The  total  to  be  provided  for  is,  therefore 
(149,250  +  50,000=)  $199,250.  Against  this  we  have  only  the 
yearly  accumulations,  amounting  to  $36,768.  So  now  our  debt  is 
increased  to  (i 99,250  —  36,768=)  $162,482. 

At  the  end  of  the  next  5  years  (50  years  in  all)  we  have  to 
provide  for  the  fifth  renewal  of  Part  "A,"  ($25,000),  the  second 
renewal  of  Part  "C"  ($100,000),  and  the  first  renewal  of  Part  **E" 
($175,000)  ;  $300,000  in  all. 

The  debt  of  $162,482  during  this  time  increases  to  (162,482 
X  1.2166=)  $197,675.  The  total  to  be  provided  is,  therefore, 
(300,000  +  197,675  =)  $497,675.  Against  this  we  have  only  $36,- 
768,  the  yearly  accumulations  for  the  five  years ;  which,  deducted, 
leaves  a  debt  of  $460,907. 

Thus  it  is  seen  that  by  the  "average  life"  scheme  which 
we  have  just  tested,  at  the  end  of  50  years,  in  spite  of  having 
laid  aside  $6,790  each  year  at  4%  compound  interest,  we  are 
actually  in  debt  for  renewals  we  have  been  obliged  to  make  to  the 
extent  of  $460,907,  the  original  value  of  plant  being  only 
$500,000. 

It  is  well  here  to  bear  in  mind  to  avoid  possible  confusion 
of  thought  that  this  demonstration  does  not  depend  in  principle 
upon  the  actual  assumptions  in  the  life  table,  as  the  same  life 
periods  have  been  assumed  in  each  case. 

In  the  scheme  which  I  have  suggested,  requiring  in  this 
case  an  annual  payment  to  Depreciation  Sinking  Fund  of  $10,- 
163,  each  part  is  treated  separately  and,  at  the  end  of  the  life 
of  each  part,  a  sufficient  amount  has  accumulated  for  renewal 
and  again  this  part  of  annual  payment  to  Sinking  Fund  goes 
on  accumulating  to  pay  for  the  next  renewal  of  the  part  con- 
cerned. 


Lecture  Notes. 


121 


While,  for  convenience  of  statement  and  to  facilitate  con- 
venient comparison  with  other  cases  of  depreciation  cost,  we  may 
calculate  out  the  average  per  cent,  of  total  value  of  plant  to  be 
laid  aside  each  year,— finding  it  in  this  case  2.03  %— still  we 
must  not  forget  that  this  total  is  made  up  of  absolutely  dis- 
tinct annual  redemption  payments,  each  to  take  care  of  its  own 
parts  of  the  plant  and  to  renew  those  parts  as  often  as  they 
wear  out. 

As  the  subject  of  depreciation  is  of  commanding  importance, 
and  as  the  results  obtained  from  the  two  systems  of  estimating 
which  I  have  shown,  diflFer  so  widely,  and  as  it  is  difficult  to 
understand  why  the  difference  at  the  end  of  50  years  should 
amount  to  almost  the  original  total  value  of  plant,  I  shall  make 
a  further  analysis  of  the  results  from  these  two  systems. 

If  $6,790  (the  amount  called  for  by  "average  life"  system) 
were  paid  into  Sinking  Fund  each  year  and  accumulated  undis- 
turbed for  50  years,  at  4  %  compound  interest,  the  total  value  of 
Sinking  Fund  would  then  be: 


Q       A  ^"  —I      iT,     1.0450— I  7.1064— I 

S  =.  A «  6790  -^^ -  6790  ^— _i-_-  _  11,036,561. 


r —  I 


1.04  —  I 


1.04  —  I 


If  $10,163  (the  amount  called  for  by  separate  Hfe  system) 
were  treated  in  the  same  way,  at  the  end  of  fifty  years  the  total 
would  be: 


o  ,7. 1064  —  I         . 

S  -  10,163     ^^2-1  '^  ^^'551,485. 


But,  by  the  life  table  assumed  in  both  cases,  we  see  that  there 
would  be  certain  withdrawals  from  each  of  these  sinking  funds. 
In  the  following  table  I  show  these  withdrawals  and  I  also  show 
the  number  of  years  in  each  case  remaining  before  the  expiration 
of  the  50  years,  during  which  the  amounts  so  withdrawn  would 
have  gone  on  accumulating  at  4  %  compound  interest  if  they  had 


122 


Business  Engineering. 


been  left  undisturbed,  and  the  total  accumulation  thereby  in  each 
case. 


1 

2 

3 

4 

5 

6 

At  End 

of 
Years. 

Parts 

to  be 

Renewed. 

Amount 
Required 

for 
Renewals. 

Unexpired 
Part  of 
60  Year 
Term. 

Value  of  $1. 
Compounded  at 

4  o^  for 
Years  Given. 

Amounts  Ac- 
cumulated at 

End  of  50 
Years.  Prin- 
cipal and 
Interest. 
Col.  3  X  Col.  5. 

Class. 

~^ 

Years. 

-1- 

10 

15 

20 

25 

30 

35 

40 

45 

50 

A 

B 

A 

C 
AandB 

D 

A 

B 
A,  C&E 

25,000 
60,000 
25,000 

100,000 
75,000 

150,000 
25,000 
50,000 

300,000 

40 
35 
30 
25 
20 
15 
10 
5 
0 

1.04*°  =  4.8009 
1.04"  -  3.9460 
l.M"  -  3.2434 
1.04"  =  2.6658 
1.04"  -  2.1911 
1.04»»  -  1.8009 
1.04»«  -  1.4802 
1.04*    =  1.2166 
1.04»    -1. 

120,022.50 

197,300.00 

81,085.00 

266,580.00 

164,332.50 

270,135.00 

37,005.00 

60,830.00 

300,000.00 

$800,000 

$1,497,290.00 

Referring  to  the  "separate  life"  system,  we  have  seen  that  if 
$10,163  were  paid  into  Sinking  Fund  yearly  and  not  disturbed 
the  total  accumulations  would  amount  to $1,551,485 

If  now  we  deduct  the  amounts  withdrawn    with 
accumulated  interest   as  shown  in  last  table 1,497,290 


we  find  we  should  have  in  the  Sinking  Fund  at  the 

end  of  the  50  years, $54,195 

If  our  calculations  are  correct,  this  should  equal  the  accrued 
liability  for  depreciation  at  the  end  of  the  50  years.  Classes  A, 
C  and  E  were  renewed  at  the  end  of  the  50  years,  so  we  have 
to  consider  only  Classes  B  and  D. 

B  was  renewed  for  the  third  time  at  45  years,  and  so  there 
has  accrued  a  5-years*  liability  on  that  part  of  plant. 

D  was  renewed  for  the  first  time  at  35  years,  and  so  there 
has  accrued  a  15-y ears'  liability  on  that  part  of  plant. 


Lecture  Notes.  123 

By  the  original  life  table  it  was  shown  that  Part  B  required  an 
annual  payment  to  Sinking  Fund  of  $2,497,  and  Part  D,  $2,037. 

Then  there  should  remain  in  the  Sinking  Fund  at  the  end  of 
50  years,  after  paying  for  all  renewals  up  to  and  including  that 
year: 

w  Q      o^«^^-°4^~i  1.2166— I 

^~  ^  "  '497  -y:^j— ^  =  2497    ^^^_^  -  I13.521 

n  G       o«,^  ^•°4^^  — I  1.8009— I 

^~        ^  ="  '°57  -j;^^^  =  2037  --^;-:3-x »  40.791 

154,312 

which  practically  agrees  with  the  amount  remaining  in  the  Sink- 
ing Fund  after  all  the  withdrawals  for  renewals  just  shown, 
amounting  to  $54,i95-  The  difference  is  accounted  for  by  the 
fractional  multipliers  not  being  carried  out  far  enough. 

Coming  now  to  the  "average  life"  figures,  we  have  seen  that 
the  total  in  Sinking  Fund  at  the  end  of  50  years,  if  the  fund 
had  been  undisturbed,  would  have  been  $1,036,561. 

But  by  the  table  of  withdrawals  we  found  that  these  amounts 
with  interest  were $1,497,290. 

This  shows  a  deficit  of $460,729, 

which  is  in  practical  agreement  with  the  amount  of  shortage  first 
shown  by  detailed  analysis,  which  was $460,907. 

If  to  the  deficit  just  shown  we  add  the  accrued  liability  as 
just  shown  in  the  case  of  the  ''separate  life"  scheme,  we  have  a 
total  deficit  of  (460,729  +  54,312)  $515,041. 

If  our  calculations  have  been  correct,  this  should  be  equal 
to  the  difference  between  the  totals  of  the  undisturbed  accumula- 
tions under  the  two  systems : 

Separate  life  system, $1,551,485 

Average  life  system, 1,036,561 

Difference— being  total  deficit  by  average  life  plan,. . .  $514,924, 
which  is  in  practical  agreement  with  the  total  deficit  just  shown. 
From  what  has  been  shown  about  providing  for  depreciation  it 
can  be  seen  how  a  sinking  fund  could  be  established  to  extinguish 
a  debt — say  to  liquidate  a  bonded  indebtedness — in  a  given  num- 


''\l 


124 


Business  Engineering, 


ber  of  years.  Such  an  arrangement  is  not  infrequently  a  feature 
of  the  trust  agreement  under  which  bonds  are  issued.  The  ex- 
tinction or  reduction  of  a  debt  under  such  a  sinking  fund  scheme 
is  known  as  amortization,  a  term  more  frequently  heard  in  Great 
Britain  than  here. 

I  have  followed  through  these  two  schemes  for  calculating 
a  depreciation  sinking  fund  because  I  have  found  that  too  often 
there  is  a  lack  of  definite  opinions  on  this  subject  among  those 
charged  with  responsiblity  in  connection  therewith;  and  that, 
further,  where  definite  opinions  are  held  they  are  not  infrequently 
based  upon  an  insufficient  knowledge  of  the  elements  entering 
into  the  problem. 

I  have  thought  also,  that  for  young  men  who  may  be  placed 
in  positions  where  questions  as  to  the  relative  merits  of  invest- 
ments may  come  up  for  solution,  before  they  have  had  the  oppor- 
tunity to  learn  in  the  school  of  experience,  it  might  be  of  some 
advantage  to  give  them  a  concrete  example  of  the  results  to  be 
obtained  from  the  straight  investment  of  money  at  compound 
interest,  even  at  as  conservative  a  rate  as  that  of  4  per  cent.  This 
lesson  may  even  be  of  value  to  those  who  have  had  actual  experi- 
ence in  the  field  of  business,  and  especially  with  **quick  rich" 
schemes  of  varying  degrees  of  contained  fallacy. 

Some  of  you  will  no  doubt  be  called  in  to  examine  the  scien- 
tific and  technical  details  of  marvelous  inventions  which  form  the 
basis  for  some  of  these  "quick  rich"  schemes. 

Unless  guarded  against,  the  inclination  too  often  exhibited  is 
to  remember  the  few  instances  of  such  schemes  which  have  quick- 
ly brought  large  pecuniary  returns,  and  to  forget  the  hundreds 
and  thousands  of  cases  where  there  has  been  either  no  pecuniary 
return,  or  only  a  moderate  return  as  the  result  of  long-continued 
and  costly  efforts  to  develop  into  practical  and  commercial  suc- 
cess some  hidden  element  of  intrinsic  merit. 

In  such  cases  which  come  up  for  decision,  it  is  well  to  keep 
always  in  mind  two  things : 

I.  You  cannot  get  out  of  anything  more  than  it  contains; 
in  spite  of  any  invention,  the  conservation  of  energy  principle  will 
be  maintained. 


Lecture  Notes. 


125 


2.  The  pecuniary  returns  to  be  obtained  from  a  business  not 
yet  established  must  compete  with  the  returns  to  be  obtained  by 
safely  investing  at  compound  interest :— that  is,  leaving  the  inter- 
est as  well  as  the  principal  to  accumulate  interest. 

In  connection  with  the  second  point  we  may  well  recollect 
that  the  majority  of  fortunes  have  been  built  up  by  frugality  and 
the  incessant  operation  of  the  accumulative  process  of  compound 
interest. 

Those  of  us  who  have  invested  moderate  amounts  from  time 
to  time  even  in  schemes  which  had  intrinsic  merit  but  which 
were  as  yet  undeveloped  and  therefore  obliged  to  pass  through 
a  period  of  no-dividends,  are  surprised  to  find  that  by  safely  in- 
vesting these  amounts  at  a  moderate  rate  of  interest  and  allowing 
them  to  compound,  we  would  have  greatly  bettered  our  fortunes 
and  saved  ourselves  from  much  needless  worry. 

If  we  have  a  business  which  as  a  resuh  of  our  particular 
skill  and  ability  as  specialists  is  bringing  us  in  a  good  return  and 
leaving  us  a  surplus  after  meeting  personal  expenses,  we  will  do 
well  to  invest  that  surplus  safely  and  allow  compound  interest  to 
do  the  rest. 

Above  all  things,  we  should  avoid  being  led  astray  by  the 
opinion  that  because  we  have  succeeded  in  the  line  of  work  for 
which  we  have  through  years  of  work  in  the  college  and  school  of 
experience  trained  ourselves  to  be  competent,  we  are  also  neces- 
sarily competent  in  other  lines,  which  up  to  that  time  we  have 
never  followed. 

Many  a  fortune  that  has  been  gained  through  years  devoted 
to  experience-getting  in  one  special  line  of  endeavor  has  been 
lost  because  the  winner  of  that  fortune  did  not  correctly  determine 
by  analysis  the  elements  entering  into  the  cause  of  that  success. 

And  the  most  dangerous  "flyer"  which  can  be  taken  is  the 
purchase  of  stocks  on  a  "margin." 

In  buying  on  a  "margin"  you  buy  perhaps  ten  times  as  much 
stock  as  you  have  money  to  pay  for,  the  balance  of  the  purchase 
price  being  borrowed  on  the  security  of  the  stock  purchased. 
Your  broker  kindly  arranges  the  loan  so  as  to  facilitate  your 
entering  into  business  relations  with  him.     The  market  price  of 


126 


Business  Engineering. 


your  purchased  stock  goes  down  and  more  margin  is  required  of 
you  by  your  broker — that  is,  you  must  put  up  more  money  or 
have  your  stock  sold  out.  The  fall  in  price  may  be  temporary, 
but  unless  you  have  the  additional  margin  of  cash  you  lose  that 
already  put  up.  Whereas,  had  you  purchased  outright, — pur- 
chased only  such  an  amount  as  you  could  pay  for  in  full, — the 
temporary  fluctuations  in  price  would  not  have  imperiled  your 
investment.  If  the  stock  represented  a  property  of  intrinsic  merit 
at  a  fair  valuation,  you  would  only  have  had  to  hold  your  securi- 
ties until  "better  times"  returned. 

We  have  just  gone  through  a  period  where  many  fortunes 
were  wiped  out  because  of  extensive  purchases  "on  margin"; 
whereas,  many  other  fortunes,  which  were  tremendously  cut  down 
"on  paper,"  have  been  restored  wholly  or  in  great  part  because 
the  depreciated  securities  were  held  by  men  who  had  money 
enough  to  protect  them  until  prices  were  restored  to  the  normal. 

I  have  been  asked  a  number  of  times  in  class  to  draw  the 
distinction  between  stock  gambling  and  the  buying  of  stocks 
for  investment. 

While  every  business  venture  must  contain  more  or  less 
of  the  element  of  speculation,  stock-gambling  is  nothing  but 
speculation. 

If  we  buy  merchandise  with  the  purpose  of  reselling  if 
possible  at  a  profit,  we  cannot  avoid  the  element  of  speculation, 
because  the  merchandise  may  increase  or  decrease  in  value  while 
in  our  hands.  In  the  same  way,  if  we  purchase  stocks  or  bonds 
for  investment,  the  element  of  speculation  is  necessarily  involved. 
In  purchasing  for  investment,  eliminating  as  far  as  possible  the 
element  of  speculation,  we  buy  only  what  zve  can  pay  for. 

In  stock-gambling,  the  purchase  is  made  by  putting  up  a 
"margin"  of  say  lo  per  cent,  of  the  market  value  of  the  stock 
purchased.  That  is,  perhaps  ten  times  as  much  stock  is  pur- 
chased as  the  purchaser  has  money  to  pay  for,  the  balance  being 
borrowed  on  the  securities  purchased. 

Evidently  then,  the  venture  is  based  upon  the  ability  of  the 
purchaser  to  correctly  estimate  the  chances  of  the  market  price 
of  the  security  rising  and  falling,  and  in  the  case  of  the  ordinary 


Lecture  Notes. 


127 


victim,  the  purchaser  has  no  control  over  the  possible  fluctua- 
tions in  price.  The  purchaser,  then,  gambles  on  chances  over 
which  he  has  no  control,  and  as  he  is  involved  to  perhaps  ten 
times  the  amount  of  the  money  he  has  put  up  as  margin,  which 
may  be  all  that  he  owns,  he  is  taking  a  risk  with  his  savings  which 
no  man  has  a  right  to  take  who  has  others  dependent  on  him 
for  support. 

In  every  panic  in  the  stock  market  competencies  and  for- 
tunes are  wiped  out  because  those  involved  cannot  protect  their 
stock  transactions. 

On  the  other  hand,  book  losses  which  come  to  bona  fide 
investors  are  frequently  made  good  wholly  or  in  part  by  the 
natural  increase  in  prices  which  always  follows  a  panic.  The 
investor  who  is  only  interested  in  the  market  through  securities 
which  he  owns  outright  can,  if  he  has  the  courage,  wait  for  the 
recovery  which  he  can  feel  sure  will  follow. 

It  needs  no  argument  to  show  that  the  selling  of  securities 
which  one  does  not  own— selling  short— is  nothing  else  but 
gambling.     It  is  a  game  of  chance. 

Replying  to  another  question— of  course,  stock  exchanges 
are  not  only  useful  institutions,  but  they  are  a  business  neces- 
sity. Without  the  broad  markets  created  by  the  facilities 
afforded  by  the  stock  exchange,  securities  would  necessarily 
have  to  be  sold  at  a  sacrifice  when  it  became  necessary  to 
promptly  turn  investments  into  ready  cash,  and  financial  opera- 
tions would  be  limited  in  countless  ways. 

But  because  the  stock  exchange  is  a  necessity  in  connection 
with  legitimate  banking  does  not  prove  that  all,  or  even  a  ma- 
jority, of  stock  exchange  transactions  are  legitimate. 

I  think,  then,  that  I  am  warranted  in  saying  that  if  we 
buy  securities  and  pay  for  them  in  full  we  are  making  a  legiti- 
mate investment,  and  if  we  make  ourselves  liable  for  more 
than  we  can  pay  for,  we  are  gambling. 

This  may  all  seem  apart  from  the  question  of  "depreciation," 
but  the  opportunity  was  afforded  me  through  the  illustrations 
of  the  workings  of  compound  interest  to  utter  a  word  of  warn- 
ing (particularly  needed,  I  think,  by  the  technical  man),  and  as 


f  ■-! 


i 


It  ! 


li 


11 


128 


Business  Engineering. 


I  am  trying  to  give  you  a  general  view  of  business  conditions 
and  methods,  I  have  not  hesitated  to  step  for  a  moment  into  this 
side  path. 

Coming  back  to  the  subject  of  depreciation  or  deterioration 
of  plant,  let  me  say  that  the  scheme  I  have  advocated  and  shown 
in  considerable  detail,  is  not  one  which,  as  far  as  I  know,  is 
generally  followed;    certainly  not  in  the  United  States. 

It  is  much  more  general  in  Europe  to  set  up  a  sinking  fund 
to  cover  depreciation  and  also  fluctuations  in  rates  of  profits  so 
that  the  dividends  may  be  maintained  at  a  uniform  rate,  or  at 
least  to  insure  their  not  being  reduced. 

It  is  not  only  of  importance  that  the  stockholders  in  a  com- 
pany should  be  able  to  calculate  in  advance  on  the  amount  of 
income  they  are  to  receive  from  their  investment,  but  it  is  im- 
portant that  the  stock  representing  the  principal  shall  not  be 
allowed  to  unnecessarily  fluctuate  in  selling-price.  At  any  time 
some  emergency  may  arise  necessitating  the  sale  of  the  stock. 
If  the  rate  of  dividend  is  allowed  to  fluctuate,  the  selling-price 
of  the  stock  will  be  unfavorably  affected. 

I  do  not  mean  to  say  that  in  the  United  States  the  loss  due 
to  depreciation  is  neglected,  but  not  infrequently  this  loss  is 
not  accurately  measured  and  so  it  cannot  be  known  whether  the 
correct  amount  has  been  withdrawn  from  the  year's  profits  to 
meet  this  item  of  loss.  Necessarily,  it  is  a  problem  which  cannot 
be  solved  with  mathematical  accuracy.  Necessarily,  the  exer- 
cise of  judgment  is  involved;  hence,  if  we  are  to  be  on  safe 
ground  we  must  depend  upon  a  specifically  trained  judgment. 
But  in  any  case  we  finally  have  to  depend  upon  an  estimate  and 
this  means  that  year  by  year  as  we  gain  further  experience  in 
the  particular  problem  to  be  solved  we  should  revise  our  scheme 
at  every  point  where  we  find  our  estimate  is  not  confirmed  by 
accomplished  fact. 

In  many  cases,  depreciation  is  more  or  less  covered  by  the 
money  taken  from  profits  and  reinvested  in  betterments  and 
extensions  of  plant. 

Sometimes  this  is  done  without  any  special  effort  being 
made  to  estimate  the  actual  depreciation. 


Lecture  Notes. 


129 


In  such  cases,  the  process  is  certainly  a  hap-hazard  one. 

Unless  we  follow  systematically  some  method  for  estimating 
the  cost  of  depreciation,  we  cannot  be  sure  that  our  capital  is  not 
being  impaired. 

1  am  chiefly  concerned,  then,  that  you  shall  understand  the 
necessity  for  this  appraisal  of  cost  of  depreciation  in  advance,  and 
so  be  prepared  to  take  measures  to  pay  fully  for  it  out  of  earnings. 

Frequently  in  the  United  States,  the  amounts  withdrawn  from 
profits  to  cover  depreciation  are  advisedly  reinvested  in  exten- 
sions and  betterments  to  the  plant  under  process  of  depreciation. 
Then  we  are  warranted  in  including  in  our  life  table  such  a  rate 
of  interest  as  we  feel  positive  that  these  betterments  and  exten- 
sions of  plant  will  earn  for  themsehes. 

If  the  yearly  return  or  rate  of  interest  (r)  is  thus  increased, 
the  amount  to  be  set  aside  each  year  (A)  will  be  decreased.  This 
scheme  would  necessitate  the  isolating  of  this  portion  of  the 
yearly  profits  and  reinvesting  them  in  further  extensions  of  plant. 
Thus  we  should  have  to  provide  for  the  investment  in  plant 
extensions  of  the  several  yearly  depreciation  payments  plus  the 
compound  earnings  from  these  extension  investments.  The  result 
would  be  complicated  and  cumbersome,  becoming  more  and  more 
so  each  year. 

The  simpler  and  more  usual  arrangement  is  to  allow  the 
earnings  from  these  extensions  of  plant  to  be  merged  with  the 
other  earnings.  In  this  case,  we  must  invest  each  year  in  plant 
extensions  such  an  amount  as,  without  assistance  from  interest 
accumulations,  (or  separate  earnings  from  these  plant  extensions) 
will  pay  for  the  several  parts  of  original  plant  in  accordance  with 
the  life  table:  For  instance,  for  a  ten  years  life,  it  would  require 
one-tenth  of  the  cost ;  for  a  fifteen  years  life,  one-fifteenth  of  the 
cost,  and  so  on. 

While  this  will  require  a  larger  yearly  payment  (A)  to  meet 
depreciation,  the  earnings  from  the  additions  to  the  plant  (r), 
which  will  be  merged  with  the  other  earnings  will  off-set  this  in- 
crease, provided  that  these  earnings  from  extensions  of  plant  do 
net  decrease  the  average  per  cent,  of  earnings. 

In  any  case,  we  must  also  provide  for  the  depreciation  of 


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If 


130 


Business  Engineering. 


these  plant  additions.  This  portion  of  the  subject  I  shall  refer 
to  again  in  connection  with  the  problems  in  accounting  to  be  con- 
sidered in  connection  with  depreciation. 

When  the  amount  deducted  from  profits  to  cover  depre- 
ciation is  invested  in  additions  to  plant,  the  record  in  the  books  of 
account  must  be  so  kept  that  no  warrant  shall  be  furnished  by 
such  record  for  the  issue  of  additional  capital  stock,  on  the  plea 
that  this  investment  represents  surplus  profits.  It  must  never  be 
forgotten  that  there  are  no  surplus  profits  until  depreciation  is 
paid  for  out  of  earnings. 

As  these  additions  to  plant  are  only  intended  to  compensate 
for  the  depreciation  in  the  value  of  the  original  plant,  such  addi- 
tional issues  would  finally  mean  the  duplication  of  capital  stock  on 
the  one  capital  investment. 

There  is  here  a  distinct  danger  which  has  already  mani- 
fested itself  in  the  field  of  United  States  finance,  and  especially 
in  reorganization  and  consolidation  schemes  of  ownership.  An 
analysis  of  the  accounts  shows,  or  appears  to  show,  that  the 
properties  of  the  concern  are  worth  more  than  the  face  value 
of  the  issued  securities — bonds  and  stock. 

So  far  as  securities  are  issued  against  extensions  to  plant 
paid  for  from  that  part  of  the  earnings  which  were  set  aside,  or 
should  have  been  set  aside,  to  compensate  for  depreciation,  so 
far  is  it  a  "watered"  issue. 

On  the  other  hand,  there  are  cases  where  the  extensions  to 
plant  paid  for  from  profits  far  exceed  the  cost  of  depreciation 
or  original  plant,  and  so  furnish  a  legitimate  warrant  for  the 
issue  of  additional  securities. 

Sometimes  the  increased  value  of  real  estate  will  com- 
pensate for  the  decreasing  value  of  plant  due  to  depreciation, 
but  it  must  be  manifest  that  an  assumption  to  this  effect  cannot 
be  safely  made  in  advance. 

If  after  the  event  we  find  such  to  be  the  case,  so  much  the 
l)etter  for  us  and  we  are  that  much  ahead.  This  is  one  of 
the  elements  of  speculation  that,  deplore  it  as  we  may,  enter  into 
every  line  of  business. 


Lecture  Notes. 


131 


Also,  the  value  of  the  business  as  a  "going  concern," — 
franchise  rights,  good-will,  &c. — may  so  appreciate  as  to  com- 
pensate for  depreciation  of  plant  and  possibly  far  more. 

But  again,  I  say  we  cannot  safely  make  such  an  assump- 
tion in  advance. 

In  taking  over  a  property,  or  group  of  properties,  the  ques- 
tion of  past  depreciation  is  taken  care  of  in  the  purchase  price. 
The  plant  may  be  greatly  in  need  of  repair  and  extension.  Then 
the  cost  of  repairs,  renewals,  extensions  and  improvements 
should  be  most  carefully  estimated  and  considered  as  a  part  of 
the  purchase  price.  To  carry  on  the  business  economically  after 
we  assume  control,  we  must  put  the  plant  in  condition  for 
efficient  operation.  Having  carefully  estimated  the  cost  of  these 
improvements  and  added  the  amount  to  the  purchase  price,  we 
must  determine  if  we  are  warranted  in  paying  the  total  cost  so 
arrived  at. 

But  it  is  here  to  be  most  carefully  borne  in  mind  that  if  we 
include  the  rehabilitation  of  plant  as  part  of  original  cost  and 
therefore  cover  this  item  by  capital  obligation,  we  must  at  once 
set  up  a  scheme  to  pay  for  the  depreciation  or  deterioration  of 
the  rehabilitated  plant  which  will  commence  as  soon  as  it  is  put 
into  operation.  It  may  be  claimed  that  this  depreciation  does 
not  commence  at  once,  that  the  plant  will  improve  in  efficiency 
for  a  certain  length  of  time  depending  upon  how  long  it  takes 
to  ''find  itself."  If  this  is  to  be  considered,  then  introduce  it 
as  an  element  in  setting  up  your  life  table;  but  do  not  delay  in 
starting  your  depreciation  sinking  fund  scheme.  As  in  many 
other  places,  there  is  here  danger  in  delay. 

It  is  possible  that  the  results  obtained  from  the  business  in 
the  past  would  show  but  a  small  rate  of  profit  on  the  enlarged 
capital.  Here  we  are  warranted  in  giving  some  weight  to  a 
conservative  estimate  of  the  increase  in  profits  to  be  derived 
from  improved  plant  and  improved  business  management. 

It  can  readily  be  seen  that  this  last  may  become  a  very  dan- 
gerous element  in  the  financing  of  schemes  of  reorganization 
and  consolidation.  The  investing  public  and  sometimes  the 
bankers  themselves  are  dependent  upon  the  estimates  of  cost  of 


132 


Business  Engineering. 


improvements  and  of  increase  in  earnings  furnished  by  the  ex- 
perts employed. 

The  subject  is  too  large  a  one  to  be  covered  in  this  brief 
course  on  the  business  side  of  engineering,  but  I  have  said 
enough  to  show  that  the  technical  expert  to  be  safely  relied 
upon,  first  by  the  banker  and  then,  through  the  banker,  by  the 
mvesting  public,  must  be  thoroughly  competent,  technically  and 
commercially. 

But  this  is  not  enough — he  must  be  honest  and  have  the 
courage  of  his  convictions.  He  must  be  strong  enough  to  say 
"no"  in  the  face  of  great  temptation. 

We  have  had  many  a  case  of  stocks  representing  these 
consolidation  schemes  declining  in  price  almost  at  once  after  the 
investing  public  have  absorbed  them  (sometimes  before  the 
absorptive  or  digestive  process  has  been  completed)  through  the 
over-estimating  of  the  value  of  the  business  and  the  under- 
estimating of  the  cost  of  rehabilitation  of  plant. 

See  to  it  that  none  of  you,  either  through  ignorance  or 
design,  are  ever  responsible  for  so  robbing  the  public. 

Here  there  is  resting  upon  you  a  professional  responsibility 
as  great  as  that  resting  upon  the  doctor  and  the  lawyer,  for 
remember  that  there  are  many  ills  worse  than  death  that  may 
follow  in  the  train  of  wrecked  fortunes. 


ACCOUNTING  AS  APPLIED  TO  DEPRECIATION, 

May,  1904. 

Referring  to  Question  4— (6)  and  (c)— Paper  of  May  6,  1904. 

I  have  been  asked— Why  should  Depreciation  be  charged 
(=  debited)  to  ''Loss  and  Gain  Account"  (=  Profit  and  Loss) 
and  credited  to  Depreciation  Sinking  Fund  Account  {=  Final  Re- 
newal Fund)? 

In  charging  estimated  depreciation  of  plant  to  Loss  and 
Gain  and  crediting  the  same  to  Depreciation  Sinking  Fund,  we 
really  skip  or  lose  sight  of  a  number  of  intermediate  steps. 

First,  think  of  "depreciation"  as  deferred  repairs  or  deferred 
renewals— or  better,  perhaps,  as  final  repairs  or  final  renewals. 
We  cannot  pay  for  depreciation  at  once,  as  we  do  in  the  case 
of  repairs,  because  the  plant  is  not  yet  to  be  abandoned;  it  is 
not  yet  worn  out;  but  we  know  it  will  wear  out  in  time  and 
so  we  must  provide  for  its  renewal  at  the  expiration  of  its  life, 
and  this  can  only  be  done  by  taking  out  of  our  profits,  year  by 
year,  such  an  amount  as  will,  accumulating  at  compound  interest 
(the  rate  of  interest  to  be  determined  by  the  exercise  of  banking 
judgment),  rebuild  or  renew  the  plant  when  it  does  finally  have 
to  be  abandoned.  (In  fact  the  plant  will  never  have  to  be  aban- 
doned as  a  zvhole  and  rebuilt  as  a  wlwle,  but  what  is  true  of  the 
parts  is  true  of  the  whole  and  for  simplicity  we  will  speak  of 
the  whole.) 

It  is  thus  seen  that  the  money  to  pay  for  repairs  or  current 
renewals,  must  be  taken  out  of  income  and  so  must  the  money 
for  final  renewals,  that  is,  depreciation.  This  money  must  come 
out  of  income  and  be  a  charge  ahead  of  profits  or  else  it  must 
come  out  of  capital.  It  can  be  at  once  seen  that  if  it  were 
taken  out  of  capital,  and  all  the  apparent  profits  paid  out  in 
dividends,  the  capital  would,  year  by  year,  be  impaired  to  the 


i 


ii 


134 


Business  Engineering. 


extent  of    the  amounts  paid  out  of  Cash    for  current  renewals 
(repairs)  and  the  accrued  liability  for  depreciation  of  plant. 

Hence  the  cost  of  repairs  (which  I  shall  hereafter  call 
current  renewals)  and  the  value  of  depreciation  (which  I  shall 
hereafter  call  final  renewals)  must  be  included  each  year  in  the 
statement  of  the  year's  operating  cost — that  is,  they  must  appear 
as  debits  or  charges  against  the  account  Loss  and  Gain  also 
known  as  Profit  and  Loss.  I  shall  hereafter  use  the  title  ''Loss 
and  Gain"  because  it  is  somewhat  more  logical;  the  losses  or 
debits  appear  on  the  left  of  the  account  and  the  gains  or  profits 
appear  on  the  right  side  of  account  and  so  correspond  with  the 
order  in  the  title.  In  the  title  Profit  and  Loss,  this  order  is 
reversed,  the  word  "profit"  on  the  debit  side  and  the  word  *1oss" 
on  the  credit. 

Bear  in  mind  that  ''Loss  and  Gain"  is  an  account  in  which 
the  several  accounts  showing  losses  and  gains  are  summarized, 
so  that  they  can  be  balanced  against  each  other  and  the  final 
result  of  the  year's  business  (loss  or  gain)  determined  by  the 
debit  or  credit  balance  of  the  account. 

Suppose  we  have  an  account  called  "Coal  Account."  If 
we  buy  coal  the  cost  is  charged  (debited)  to  that  account  and 
at  the  end  of  the  year  the  debit  balance  of  that  account,  after 
taking  account  of  stock  of  coal  on  hand,  will  be  carried  into 
Loss  and  Gain  as  one  of  the  items  of  the  year's  operating  cost. 
It  will  be  on  the  Dr.  or  loss  side.  But  if  we  transfer  the  charge 
for  coal  from  Coal  Account  to  Loss  and  Gain  Account,  we 
cannot  leave  the  debit  balance  against  Coal  Account  also  open 
on  the  Ledger;  if  we  did  so,  we  should  have  two  charges  open 
on  our  books  for  the  same  item.  So  in  transferring  the  charge 
to  Loss  and  Gain,  we  credit  a  like  amount  to  Coal  Account  to 
close  or  balance  that  account,  and  now  we  have  the  item  for  the 
cost  of  the  year's  consumption  of  coal  appearing  as  one  of  the 
debit  items  of  Loss  and  Gain;  that  is,  one  of  the  losses.  The 
charge  against  Coal  has  not  been  wiped  out  but  it  has  been 
transferred  from  the  separate  coal  account  to  the  general  ac- 
count called  Loss  and  Gain  as  one  of  its  debit  items.  So,  if 
we  skip  the  intermediate  steps,  when  we  pay  cash  for  coal,  we 


Lecture  Notes. 


135 


credit  "Cash  Account"  because  it  paid  out  the  money  for  the  coal 
and  we  debit  Loss  and  Gain  because  the  money  paid  out  for  coal 
is  one  of  the  items  of  the  year's  expense  or  loss. 

What  is  true  of  coal  is  true  of  all  the  other  operating 
expenses  of  the  business,  including  manufacturing  material, 
wages,  rent,  salaries,  stationery,  stamps,  sales  commissions,  etc., 
etc. ;  and,  of  course,  current  renewals  of  plant  and  final  renewals. 
That  is,  the  losses  of  the  year  certainly  must  include  the  wear 
and  tear  on  the  plant. 

If  a  belt  breaks,  or  an  armature  burns  out  or  a  shutter 
blows  oflf  the  building  and  breaks,  these  parts  will  be  renewed 
and  paid  for  out  of  Cash.  Then  Cash  will  be  credited  and  the 
proper  repair  account  will  be  charged  or  debited  with  the 
amount  paid  out  on  its  behalf.  I  say  the  "proper"  repair  ac- 
count, because  for  greater  faciHty  of  analysis  we  should  probably 
have  more  than  the  one  repair  account;  for  instance,  "Steam 
Plant  Repairs,"  "Electric  Machinery  Repairs,"  "Building  Re- 
pairs," etc.  But  for  greater  simplicity  in  our  present  discussion 
let  us  assume  that  we  have  only  the  one  "Repairs  Account"  to 
cover  current  renewals.  At  the  end  of  the  year  there  will  be  a 
debit  balance  against  "Repairs  Account"  equal  to  the  sum  of  all 
the  current  renewal  items,  unless  this  is  reduced  by  some  credit 
items  for  material  or  scrap  recovered. 

In  closing  the  books  the  total  cost  of  current  renewals  will 
have  to  be  carried  into  Loss  and  Gain  Account  as  already  ex- 
plained, and  that  we  may  not  have  a  duplication  of  charges,  we 
must  credit  "Repairs  Account"  with  the  amount  transferred  to  the 
debit  side  of  Loss  and  Gain,  all  as  in  the  case  of  Coal.  Repairs- 
will  now  appear  as  one  item  of  loss  in  "Loss  and  Gain  Account'^ 
and  therefore  must  not  also  appear  in  the  separate  account  of 
"Repairs  Account." 

Now  with  Final  Renewals  (=  Depreciation)  we  must  get  the 
estimated  cost  for  the  year  into  the  account  which  summarizes 
the  losses  and  gains  for  the  year,  namely,  "Loss  and  Gain  Ac- 
count." 

But  this  case  is  different  from  current  renewals  because  we 
have  no  payment  to  make  at  once ;  we  are  only  laying  aside  from 


t  i 

4 


f 


fti 


P    ■ 


136 


Biisuicss  Engineering. 


our  income  an  amount  which  we  believe  will  be  later  required  to 
make  good  the  accrued  and  constantly  accruing  liability  for  that 
part  of  the  wear  and  tear  on  our  plant  which  is  not  made  good 
by  current  renewals  paid  for  out  of  Cash. 

In  the  case  of  current  renewals  we  had  a  debit  and  a  credit 
because  we  charged  ^Repairs  Account"  for  the  work  done  and 
we  credited  "Cash  Account"  for  the  money  supplied. 

In  the  case  of  final  renewals  we  might  decide  to  charge  to 
some  intermediate  account  before  charging  to  "Loss  and  Gain  " 
the  same  as  we  first  charged  current  renewals  to  "Repairs  Ac- 
count" and  later  transferred   the   several    items  of  the  Repairs 
Account  m  bulk  to  Loss  and  Gain.    Suppose,  then,  we  first  charge 
final  renewals  to  Depreciation  Account.     (It  will  be  seen  that 
there  is  not  the  same  reason  for  first  passing  into  an  intermediate 
account  as  in  the  case  of  repairs,  because,  unlike  current  renewals 
there  is  only  one  charge  for  depreciation  to  make  for  each  closing 
of  the  books    and  therefore  we  would  only  pass  the  item  into 
Depreciation  Account  and  immediately  transfer  it  by  cross  entry 
to  Loss  and  Gain  Account,  whereas,  with  current  renewals    we 
employ  the  intermediate  "Repairs  Account"  in  which  to  group  or 
classify  the  many  items  occurring  through  the  year.    But  we  will 
now  use  Depreciation  Account  to  better  explain  all  the  steps.) 

There  is  one  point  not  covered.     When  we  charged  current 
renewals  to  Repairs  Account  we  were  able,  as  I  have  already 
shown,  to  make  the  entry  complete  by  crediting  Cash  Account 
with  the  money  paid  out.     We  must  then  find  a  credit  entry  to 
balance  our  charge  to  "Depreciation  Account,"  or  we  should  have 
a  debit  without  a  corresponding  credit.     There  was  no  payment 
from  Cash    so  we  cannot  credit  that  account.     As  there  is  no 
actual  transfer  of  cash,  Cash  Account  is  not  involved.    The  entry 
is  made  to  record  the  charge  against  the  year's  profit  to  meet  an 
accrued  liability  and  to  show  that  this  amount  has  been  taken  out 
of  income  and  cannot  be  employed  to  swell  profits  or  surplus. 
We  want  to  show  that  this  amount  is  set  aside  for  a  specific  pur- 
pose, to  redeem  a  loss  later  to  be  in  evidence.     Therefore,  in 
charging  to  Depreciation  (later  transferred  as  a  debit  or  charge 
to  Loss  and  Gain)  we  credit  the  amount  to  "Depreciation  Sinking 


Lecture  Notes. 


137 


Fund  Account,"  or  "Depreciation  Redemption"  or  "Final  Re- 
newal Fund,"  or  any  other  title  which  will  properly  express  our 
purpose. 

You  may  say,  if  we  give  the  amount  to  "Final  Renewal 
Fund,"  why  should  we  credit  that  account  ?    But  we  do  not  give 
the  money  to  that  account.    Cash  Account  still  has  control  of  it 
and  may  now  be  said  to  have  received  it  from  "Final  Renewal 
Fund."    Originally  Cash  Account  received  the  money  from  some 
of  our  sources  of  income  and  credit  was  given  at  the  time  to  the 
proper  income  accounts   and  debit  was  made  to  Cash.    The  con- 
dition has  not  changed  with  regard  to  Cash  Account ;  it  had  the 
money  in  hand  before  the  entry  was  made  "Depreciation  Account 
Dr.  to  Final  Renewal  Fund"  and  the  making  of  that  entry  has 
not  changed  the  responsibility  of  Cash  except  that  it  is  now  re- 
sponsible to  ''Final  Renewal  Fund''  for  this  amount   instead  of 
being  responsible  to  some  other  account  or  accounts  as  before. 

Let  us  go  a  step  further,  and  suppose  we  decide  to  place  the 
Final  Renewal  Fund  in  the  hands  of  some  Trust  Company  as 
Trustee,  the  Trust  Company  agreeing  to  pay  say  3  per  cent, 
compound  interest,  on  the  deposit.  Then  when  we  turn  the  fund 
over  to  the  Trust  Company  we  should  charge  the  Trust  Company 
and  credit  Cash ;  but  the  amount  would  still  remain  to  the  credit 
of  "Final  Renewal  Fund"  as  it  should. 

Now  consider  this  for  a  moment  with  regard  to  a  statement 
of  assets  and  liabilities.  In  such  a  statement  the  assets  are  found 
on  the  debit  (left)  side  of  the  Ledger  and  the  liabilities  on  the 
credit  (right)  side.  For  instance,  if  we  pay  out  money  for  plant, 
or  stock,  or  real  estate,  we  charge  those  accounts  and  the  amounts 
so  charged  appear  on  the  debit  (left)  side  of  the  Ledger  and  rep- 
resent assets  or  money  invested  in  property. 

On  the  other  hand,  we  receive  money  from  stockholders,  or 
bondholders  and  we  have  to  credit  those  from  whom  we  receive 
the  money  and  the  amounts  so  credited  appear  on  the  credit 
(right)  side  of  Ledger  and  represent  liabilities,  or  money  received 
for  which  we  must  account.  Now  the  "Final  Renewals  Fund  Ac- 
count" will  show  a  balance  on  tbe  credit  side  of  Ledger,  and 
therefore  represents  a  liability,  as  it  should  do. 


I- 

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I 


138 


Business  Engineering. 


To  summarize,  Depreciation  is  charged  to  Loss  and  Gain 
(first  passing  it  to  the  debit  of  Depreciation  Account,  if  we  prefer) 
and  credited  to  Final  Renewal  Fund  (or  Depreciation  Sinking 
Fund,  if  we  prefer  that  title)  and  so  we  acknowledge  the  fact 
that  Depreciation  has  been  one  of  the  losses  of  the  year  and 
establish  the  amount  of  that  loss  and  we  acknowledge  that  the 
cash  value  of  this  loss  is  set  aside  to  meet  this  accrued  liability 
and  therefore  cannot  be  employed  for  any  other  purpose.  Cash 
Account  and  the  other  asset  accounts  involved  acknowledge  that 
they  have  the  custody  of  these  funds  and  must  account  for  them 
when  called  upon  to  do  so. 

In  my  Notes  on  Repairs  and  Depreciation  I  have  referred 
briefly  to  the  case  where  depreciation  is  covered  by  reinvesting 
part  of  the  earnings  in  extensions  and  betterments  of  plant,  the 
separate  earnings  from  these  plant  extensions  being  allowed  to 
merge  with  the  other  earnings.  I  explain  that,  as  the  earnings 
from  these  extensions  of  plant  could  not  be  isolated  or  separately 
identified,  it  would  be  necessary  to  increase  the  amount  to  be  so 
set  aside  to  cover  depreciation,  as  the  amount  set  aside  from  year 
to  year  would  not  be  directly  assisted  by  interest  accumulations. 
In  this  case  the  accounting  steps  would  be  quite  simple,  for  the 
Journal  entry  would  be  to  charge  Loss  &  Gain,  and  credit  the 
plant  account  involved.  In  this  respect  it  would  be  similar  to  the 
case  of  depreciation  in  merchandise,  as  later  to  be  referred  to  in 
connection  with  the  analysis  of  a  balance  sheet.  In  this  latter 
case  the  Journal  entry  would  be : — 

Loss  &  Gain  Dr.  000.00 

to  Merchandise  000.00 

For  depreciation  of  merchandise 

in  stock,  2  %  of  $ . 

In  the  case  of  depreciation  in  plant,  the  entry  would  be : — 
Loss  &  Gain  Dr.  000.00 

to  Plant  Account  000.00 

For  estimated  depreciation  of 
plant  during  the  fiscal  year, 
ending  . 


Lecture  Notes. 


139 


While  the  bookkeeping  method  that  is  suggested  is,  ap- 
parently, a  simple  one,  it  does  not  provide  the  means  of  readily 
checking  up  the  accuracy  of  the  estimated  cost  of  depreciation, 
and,  of  course,  it  cannot  be  followed  where  the  sinking  fund 
scheme  is  employed. 

It  will  be  noted  that  by  this  method  the  debit  balance  of  Plant  Ac- 
count is  reduced  by  the  items  credited  to  that  account  and  charged 
to  Loss  &  Gain  on  account  of  depreciation,  and  thus  the  asset  of 
plant  is  shown  at  a  constantly  reduced  value,  to  correspond  with 
the  estimated  reduction  on  account  of  depreciation.  Suppose  that 
we  should  each  year  expend  in  extensions  and  betterments  of 
plant  the  exact  amount  required  to  cover  depreciation.  These  ex- 
penditures would  be  charged  to  Plant  Account,  and  so  the  orig- 
inal debit  balance  would  be  exactly  maintained,  and  this  would 
correctly  represent  the  facts,  for  we  should  put  into  plant  in  the 
form  of  extensions  sufficient  extra  value  to  compensate  for  the 
depreciated  value  of  the  original  plant. 

As  I  have  stated  to  you  repeatedly  in  my  lectures,  the  item 
of  depreciation  is  treated  by  accountants  in  many  different  ways. 
I  have  no  desire  to  support  any  particular  method,  but  I  am 
chiefly  interested  in  bringing  you  to  an  understanding  of  the 
fact  that  depreciation  is  to  be  reckoned  with  as  a  constant  source 
of  loss,  and  that  by  some  consistent  scheme  of  accounting  a  com- 
plete and  self-explanatory  record  must  be  kept  of  this  accruing 
liability. 


:4li 


li 


ACCOUNTING   APPLIED   TO   DEPRECIATION- 
CONTINUED. 

May,  1904. 

The  crediting  to  Depreciation  Sinking  Fund  of  the  amount 

set  aside  each  fiscal  period  to  cover  depreciation  of  plant  appears 

still  to  trouble  a  number  of  the  members  of  the  class.     I  will 

therefore  make  a  further  effort  to  show  why  this  credit  is  made. 

First  let  us  again  call  to  mind  the  fact  that  the  plant,  day 

by  day,  month  by  month,  and  year  by  year,  will  depreciate  in 

value  and  this  in  spite  of  the  current  repairs  or  renewals  put 

upon  the  plant  and  paid  for  out  of  the  current  income.     We 

estimate  that  the  several  parts  of  the  plant  will  have  certain 

lengths  of  life  and  by  the  scheme  which  I  have  already  described 

we  determine  what  percentage  of  the  cost  of  the  plant  must  be 

set  aside  each  year  to  cover  the  depreciation  which  has  occurred 

during  that  period.     If  this  were  not  done,  the  loss  of  necessity 

must  fall  upon  capital. 

The  losses  and  the  gains  of  any  fiscal  period  we  gather 
together  under  one  account,  entitled  Loss  and  Gain.  On  the 
debit  side  we  write  up  all  the  losses  and  on  the  credit  side  we 
write  up  all  the  gains.  Let  us  now  assume  that  every  such  item 
has  been  written  into  Loss  and  Gain  Account  except  this  item  of 
depreciation.  Then  Loss  and  Gain  Account  will  show  the  gross 
profits,— if  any  profits  have  been  made,— which  must  be  now 
reduced  by  the  amount  of  depreciation.  In  other  words.  Loss 
and  Gain  Account  now  has  to  its  credit  a  certain  amount 
to  which  it  has  no  claim  but  which  should  be  credited  to  some 
account  which  unll  hereafter  be  called  upon  to  meet  the  payments 
for  the  renewal  of  the  several  parts  of  the  plant  as  the  times  come 
for  their  iinal  renewal.  We  therefore  make  an  entry  debiting 
Loss  and  Gain  with  this  depreciation  item  so  as  to  take  out  from 
that  account  the  credit  which  it  should  not  have,  and  we  credit  it 
to  an  account  entitled   Depreciation   Sinking  Fund   (or  some 


Lecture  Notes. 


141 


equivalent),  the  account  which  should  have  the  credit    because 
later  it  will  be  called  upon  to  stand  the  cost  of  renewals. 

You  may  still  say,  why  should  Depreciation  Sinking  Fund 
be  credited  with  this  amount  when  it  is  receiving  it  from  Loss 
and  Gain?  But  it  is  not  receiving  it.  We  are  simply  making 
an  exchange  of  credits.  Cash  Account,  or  some  other  asset 
account,  still  has  the  actual  money  or  its  equivalent  in  hand. 

Let  us  assume  for  simplicity  that  it  is  a  matter  of  Cash  and 
that  the  working  capital  is  all  in  the  form  of  cash.     Then  Cash 
Account  has  not  delivered  up  to  Depreciation  Sinking  Fund  this 
amount  of  money,  but  we  have  simply  made  an  entry  to  show 
that  Cash  Account  instead  of  owing  it  to  Loss  and  Gain  Ac- 
count now  owes  it  to  Depreciation  Sinking  Fund.     If  we  should 
decide  not  to  leave  that  money  in  the  hands  of  Cash  Account 
but  to  set  it  up  as  a  separate  deposit,  then  when  Cash  Account 
delivered  it— say  into  the  hands  of  the  Safety  Trust  Company- 
Cash  Account  would  then  be  credited  (balancing  the  previous 
debit  or  debits  when  the  money  was  entrusted  to  Cash  Account) 
and  the  Safety  Trust  Company  would  be  debited  and  we  should 
now  have  two  accounts  which  balance  each  other;    the  Safety 
Trust  Company  being  debited  with  the  full  amount  of  the  fund 
because  the  money  had  been  entrusted  to  its  care,  and  the  De- 
preciation Sinking  Fund  being  credited   with   the  full   amount 
because  later  we  are  going  to  debit  this  account  with  the  cost 
of  making  good  the  several  parts  of  the  plant  as  they  have  to 
be  renewed.     We  have  reclaimed  from  our  gross  profits,  year 
by  year,  the  amount  required  to  compensate  for  depreciation. 
If  this  amount  were  found  on  the  books  simply  as  an  asset, 
say   for  instance    as  a  deposit  in  the  Safety  Trust  Company,  it 
might  be  regarded  as  a  part  of  surplus  profits  and  therefore  we 
would  be  at  liberty  to  pay  it  out  to  the  partners  or  stockholders 
as  dividends;    in  other  words,  there  would  be  nothing  to  show 
that  this  fund  was  in  trust  to  be  used  only  for  a  special  purpose, 
namely  the   making  good   the   impairment  of  capital   through 
depreciation  of  plant.     Now  in  addition  we  have  the  credit  bal- 
ance in  favor  of  Depreciation  Sinking  Fund    which  shows  that 
the  amount  deposited  with  the  Safety  Trust  Company  has  been 


142 


F  % 


Pi 


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W 


ft 

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Business  Engineering, 


received  by  us  from  Depreciation  Sinking  Fund  to  be  later 
used  for  a  specific  purpose  and  not,  therefore,  to  be  regarded 
as  part  of  suplus  profits. 

To  help  you  to  understand  that  there  can  be  an  exchange 
of  cred,ts  or  of  debits  without  involving  cash,  let  us  suppofe 
the  following  case: 

Smith  owes  Robinson  $ioo; 
Robinson  owes  Jones  $ioo;  and 
Jones  owes  Smith  $ioo. 

It  is  a  triangular  condition  of  debits  and  credits,  thus: 

SMITHES  LEDGER. 


Dr. 

Robinson's  Account. 

• 

Jones'  Account. 
$100. 

Cr 

$100 

ROBINSON'S  LEDGER. 

Dr. 

Jones'  Account. 

Cr. 

$100 

Smith's  Account. 
$100. 

JONES'  LEDGER. 

Dr. 

Smith's  Account. 

Robinson's  Account. 
$100. 

Cr. 

$100 

Now  Jones  says  to  Smith,  "I  will  settle  my  account  with 
you  by  givmg  you  the  benefit  of  my  credit  with  Robinson." 

Smith  accepts  the  proposition  and  Robinson  is  requested 
by  Jones  to  transfer  his  (Jones')  credit  to  Smith's  account. 

Robmson  then  makes  a  Journal  entry: 

J°"es  $loo 

Dr.  to  Smith,  ^^^ 

which  being  posted  in  Robinson's  Ledger  debits  Jones'  account 


Lecture  Notes. 


143 


$100  and  credits  Smith's  account  $ioo  for  Jones'  credit  with 
Robinson  transferred  to  Smith;    which  entries  balance  Smith's 
and  Jones'  accounts  in  Robinson's  Ledger. 
Jones  makes  an  entry: 

Smith  $100 

Dr.  to  Robinson,  $ioo 

which  being  posted  in  Jones'  Ledger  debits   Smith's  account 
$ioo  and  credits  Robinson's  account  $ioo  for  Jones'  credit  with 
Robinson  transferred  to  Smith;  v/hich  entries  balance    Smith's 
and  Robinson's  accounts  in  Jones'  Ledger. 
Smith  makes  an  entry: 

Robinson  $ioo 

Dr.  to  Jones,  $ioo 

which  being  posted  in  Smith's  Ledger  debits  Robinson  $ioo  and 
credits  Jones  $ioo  for  Jones'  credit  with  Robinson  transferred 
to  Smith;  which  entries  balance  Robinson's  and  Jones'  accounts 
in  Smith's  Ledger. 

So  all  these  credits  and  debits  have  been  cancelled  but  there 
has  been  no  transfer  of  cash  in  any  case. 

This  not  only  serves  to  illustrate  the  point  under  discussion, 
but  it  also  illustrates  how  much  of  the  world's  business  is  carried 
on  by  transfer  of  credits  without  cash  changing  hands. 


T 


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SYSTEMS  OF  CLASSIFICATION- 

Accounts  'Taxes/'  "Accrued  Taxes,"  "Advance  Taxes. 


j> 


In  my  talks  I  have  frequently  referred  to  a  certain  book 
giving  the  scheme  of  classification  developed  by  a  committee 
charged  with  the  duty  of  reporting  a  uniform  system  of  accounts 
for  a  certain  important  industry. 

This  book  gives  the  classification  of  operating  expense  ac- 
counts ;  classification  of  betterments  or  property  accounts ;  forms 
of  monthly  journal  entries  and  rules  for  closing.  The  report 
also  includes  blank  forms  for  books  and  statements  to  be  used 
in  making  the  system  effective. 

To  place  the  classification  scheme  intelligently  before  those 
interested,  there  is  first  given  the  report  of  the  committee,  then 
general  remarks  and  instructions,  then  an  index  of  the  accounts, 
then  a  summary  of  the  sub-divided  operating  accounts  grouped 
under  the  respective  general  accounts,  then  each  account  is 
defined  and  explained  in  detail,  a  separate  page  (or  more,  if 
necessary)  being  devoted  to  each  account.  After  these  separate 
descriptions  of  the  accounts  there  are  given  the  forms  for  the 
regular  monthly  journal  entries,  then  the  "Rules  for  Closing 
Books  at  End  of  Fiscal  Year,"  followed  by  the  closing  journal 
entries.  These  are  followed  by  an  index  showing  to  what  ac- 
counts the  items  of  expense  named  should  be  charged. 

The  general  accounts  are  indicated  by  letters  of  the  alpha- 
bet and  the  sub-divisions  of  these  accounts  by  numerals.  For 
instance,  "Manufacturing  Labor,"  a  sub-division  of  "Manufac- 
turing Account,"  is  shown  as  A-7,  A  indicating  the  general 
account  "Manufacturing"  and  7  the  sub-division  of  that  account, 
"Manufacturing  Labor." 

On  the  pages  devoted  to  the  detailed  descriptions  of  the 
accounts  appear  first  the  title  of  the  account  with  the  account's 
letter  and  number,  then  a  definition    of   the  purpose  of  the  ac- 


Lecture  Notes. 


145 


count,  then  the  items  to  be  carried  into  the  account,  then— if 
need  be— the  journal  entries  involved  and  accompanying  ex- 
planations, and,  finally,  general  explanatory  notes. 

Thus,  sufficient  information  is  given  to  enable  a  bookkeeper 
to  put  the  system  into  effect.  In  fact,  in  many  cases,  some  of 
my  associates  on  the  committee  thought  that  the  explanations 
and  notes  were  unnecessarily  elementary. 

After  the  description  of  the  regular  system  of  accounts 
follows  a  description  of  a  "Junior"  system,  which  was  prepared 
at  the  special  request  of  certain  of  those  interested  in  the  indus- 
try who  felt  that  the  full  system  would  be  "too  complicated." 

This  junior  system  is  simply  a  condensed  form  of  the  com- 
plete system.  The  general  accounts  of  the  fuller  system  are  em- 
ployed, but  they  are  not  so  minutely  subdivided. 

In  this  connection  it  is  well  to  quote  from  the  committee's 
report : 

"Your  Committee,  in  preparing  a  junior  system  of  accounts, 
has  been  influenced  so  to  do  by  the  expressed  demand  for  a 
simpler  system ;  but  your  Committee,  in  submitting  a  condensed 
system  in  accordance  with  this  demand,  would  call  attention  to 
the  fact  that,  while  a  condensation  of  accounts  lessens  the  actual 
labor  in  the  bookkeeping  department,  it  distinctly  adds  to  the 
labors  of  the  conscientious  manager,  as  it  affords  him  less  oppor- 
tunity to  effectively  analyze  his  operating  costs  and  make  the 
proper  comparisons,  and  such  comparisons  can  then  be  com- 
pletely made  only  by  laboriously  sub-dividing  these  condensed 
book  accounts  at  greater  cost,  as  the  occasion  demands." 

In  a  business  of  any  magnitude  it  is  advisable  to  have  the 
classification  of  accounts  so  shown  in  book  form  for  ready  refer- 
ence. Questions,  which  are  sure  to  arise,  can  then  be  promptly 
answered  and  always  answered  in  the  same  way.  The  memory 
cannot  always  be  safely  relied  upon  in  such  cases. 

I  will  now  quote  in  full  the  descriptive  matter  in  the  case 
of  three  of  these  accounts,  and  I  will  use  this  material  to  explain 
in  detail  the  questions  involved  in  Advance  Payment  Accounts 
and  Accrued  Accounts. 

It  is  to  be  noted  that  with  these  accounts  there  appears  no 


'  » 


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146 


Business  Engineering. 


list  of  items  properly  chargeable  to  the  accounts,  because  they 
have  to  do  only  with  one  item — taxes. 

First  recollect  that  in  making  up  a  statement  of  income  and 
expense  for  any  period  there  must  be  included  all  items  of  ex- 
pense or  loss,  whether  they  have  actually  been  so  far  paid  or 
not;  and  we  must  take  credit  for  such  amounts  as  have  been 
paid  in  advance,  the  whole  payment  or  part  of  it  being  applica- 
ble to  a  subsequent  period  as  an  item  of  expense  or  loss. 

Also  liabilities  which  have  so  accrued  must  be  so  shown 
in  the  Balance  Sheets  of  the  following  fiscal  period;  and  assets 
which  have  been  built  up  by  advance  payment  must  also  be  so 
shown. 

In  short,  the  total  earnings  and  expenses  of  the  period 
covered  must  be  shown  quite  apart  from  the  question  whether 
the  earnings  are  fully  represented  by  cash  receipts  and  the  ex- 
penses by  cash  payments. 

I  have  selected  the  case  of  taxes  by  which  to  explain  this 
principle. 

In  the  classification  book  referred  to,  the  account  of 
"Taxes"  appears  among  the  operating  accounts;  the  account 
"Advance  Taxes"  appears  among  the  advance  payment  ac- 
counts; the  account  "Accrued  Taxes"  appears  among  the  ac- 
crued accounts. 

I  now  quote  from  the  classification  book  referred  to: 

''Taxes. 

"This  account  is  intended  to  show  the  amount  of  taxes, 
whether  paid,  due  and  not  paid,  or  accrued  but  not  due,  applica- 
ble to  the  elapsed  period  of  the  current  fiscal  year. 


"Taxes — City,  County  and  State. 

"To  keep  this  account  accurately,  it  is  necessary  to  ascertain 
the  specific  twelve  months  for  which  each  class  of  taxes  is  as- 
sessed and  levied.  If  the  period  covered  by  tax  levy  corresponds 
with  the  fiscal  year  of  the  company,  and  the  taxes  are  paid  at  the 
beginning  of  the  period  for  which  such  levy  is  made,  the  amount 
when  paid  should  be  charged  to  'Advance  Taxes';  but  if  the 
taxes  are  due  and  payable  at  the  end  of  the  period  for  which  such 


I 


Lecture  Notes.  jAy 

levy  is  made,  the  amount  when  paid  should  be  charged  to  'Ac- 
crued Taxes/ 

"If  the  period  covered  by  any  tax  does  not  correspond  with 
the  fiscal  year  of  the  company,  the  amount  of  the  tax  when  paid 
should  be  divided  between  'Accrued  Taxes'  and  'Advance  Taxes' 
m  the  proportion  applicable  to  each. 

"(Payments  charged  to  'Advance  Taxes'  shall  always  be  for 
taxes  covering  a  period  subsequent  to  the  date  such  payment  is 
made,  and  payments  charged  to  ^Accrued  Taxes'  shall  always  be 
for  taxes  covering  a  period  prior  to  the  date  such  payment  is 
made.) 

"Journal  entries  should  be  made  each  month  charging  'Tax- 
es' and  crediting  'Advance  Taxes'  with  the  proportion  (one- 
twelfth)  of  each  class  of  taxes  paid  in  advance  and  charging 
Taxes'  and  crediting  'Accrued  Taxes'  with  the  proportion  (one- 
twelfth)  of  each  class  of  taxes,  accrued  but  not  due,  based  upon 
the  amount  shown  by  the  tax  rolls,  if  made  up,  or  if  not  made 
up,  on  an  estimated  amount  based  on  the  previous  year's  tax  or 
any  other  reliable  data. 

"Taxes  assessed  for  Improvements  to  be  charged  to  Real 
Estate  Account  (see  'Real  Estate'). 

^^^^^  000.00 

Advance  taxes ^^  ^ 

For  proportion  of  taxes  paid  in  advance 

applicable  to  the  month  of . 

One-twelfth  of  $ = $ 

State  and  County,  i-i2th  of  $ =  $ 

City  and  School,    i-i2th  of  $ =$ 

^^^^   000 .  00 

Accrued   taxes ,^  ^^ 

For  estimated  taxes  accrued,  but  not  due, 

applicable  to  the  month  of . 

State  and  County,  i-i2th  of  $ =  $ 

City  and  School,    i-i2th  of  $ =  $ 

"NoTE.--At  end  of  the  year  close  this  account  (Taxes)  into 
'Loss  and  Gain.'  " 

This  is  the  end  of  the  page  devoted  to  "Taxes." 

(In  the  book  in  place  of  "Loss  and  Gain"  is  shown  another 


* 

^ 


148  Business  Engineering. 

account  into  which  the  "Taxes"  is  closed  on  its  way  to  "Loss 
and  Gain  Account" — for  simplicity,  I  show  it  as  going  direct  into 
"Loss  and  Gain.") 

*' Advance  Taxes. 
"This  account  is  intended  to  show  the  amount  paid  for  taxes 
covering  a  period  subsequent  to  the  date  such  payment  is  made. 

"Credit  this  account  and  charge  Taxes'  Account  each  month 
with  proportion  of  taxes  applicable  to  this  month. 
"See  following  entry; 

Taxes  000.00 

Advance  taxes 000.00 

For  proportion  of  taxes  paid  in  advance, 

applicable  to  month  of . 

One-twelfth  of  $ = $ 

State  and  County,  i-i2th  of  $ =  $ 

City  and  School,    i-i2th  of  $ =  $ 

"Note. — See  Taxes'  for  full  explanation." 

This  is  the  end  of  the  page  devoted  to  "Advance  Taxes." 

''Accrued  Taxes. 
"This  account  is  intended  to  show  the  amount  of  taxes 
accrued  but  not  due,  covering  a  prior  period.     The  balance  of 
this  account  will  at  all  times  show  the  accrued  liability  for  taxes. 

"Credit  this  account  and  charge  Taxes'  Account  each 
month  with  estimated  amount  of  taxes  accrued,  but  not  yet  due 
or  payable — estimate  to  be  based  on  previous  year's  tax  bills, 
unless  accurate  method  of  estimating  for  current  year  can  be 
arrived  at.     See  the  following  entry: 

Taxes   000.00 

Accrued   taxes 000.00 

For  estimated  taxes  accrued,  but  not  due, 
applicable  to  month  of . 

State  and  County,  i-i2th  of  $....=$... . 

City  and  School,    i-i2th  of  $ =$.... 

"Note. — See  Taxes'  for  full  explanation." 

This  is  the  end  of  the  page  devoted  to  "Accrued  Taxes." 


Lecture  Notes. 


149 


The  explanations  as  contained  in  these  three  pages  of  the 
classification  book  would  be  all-sufficient  for  one  familiar  with 
accounts. 

But  I  have  found  that  you  are  not  able  from  these  de- 
scriptions to  fully  understand  all  the  accounting  steps  to  be 
taken  in  connection  with  taxes.  I  will  therefore  go  into  this 
matter  in  some  detail  with  the  purpose  of  explaining  directly 
this  particular  case  and  incidentally  Advance  Payments  and  Ac- 
crued Accounts  in  general. 

What  has  already  been  given  you  on  the  accounting  features 
of  Depreciation  has  furnished  another  example  of  the  workings 
of  an  Accrued  Account. 

First  turn  back  and  read  again  the  note  in  parentheses  as 
quoted  from  the  classification  book  under  the  head  of  "Taxes." 

Now  note  that  in  both  the  Journal  entries,  "Taxes  Dr.  to 
Advance  Taxes"  and  "Taxes  Dr.  to  Accrued  Taxes,"  the  ac- 
count "Taxes"  is  debited  with  one-twelfth  of  the  total  yearly 
payment  for  taxes.  Thus  all  the  charges  for  taxes  are  made 
through  the  Journal  and  when  the  cash  is  actually  paid  Cash 
will  be  credited  and  the  charge  must  be  made  against  some 
other  account  than  "Taxes"  or  we  should  have  this  expense  or 
loss  account  charged  with  an  amount  not  warranted  by  the  facts. 

If  a  tax  bill  is  paid,  part  of  which  applies  to  a  period  subse- 
quent to  the  date  of  payment,  that  part  will  be  debited  to 
"Advance  Taxes."  Then  the  debit  balance  of  this  account  will 
represent  an  asset,  the  asset  being  reduced  in  value  monthly  by 
the  Journal  entry: 

Taxes  000.00 

Advance  taxes  000.00 

Here  you  see  the  cash  transaction,  and  hence  the  Cash  entry 
precedes  the  Journal  entry. 

In  the  case  of  taxes  paid  after  the  liability  has  accrued,  the 
Journal  entry 

Taxes  000.00 

Accrued  taxes  000.00 

will  have  preceded  the  Cash  entry. 


II 


I  III 


A  It 


ii> 


150 


Business  Engineering. 


The  balance  so  built  up  to  the  credit  of  "Accrued  Taxes" 
will  represent  a  liability. 

Later,  when  the  cash  is  paid,  Cash  will  be  credited,  and  so 
much  of  the  cash  payment  as  is  applicable  to  periods  prior  to 
the  payment,  will  be  debited  to  "Accrued  Taxes,"  wiping  out  the 
liability  balance  built  up  by  the  Journal  entries  which  preceded 
the  Cash  entry. 

It  is  then  to  be  particularly  noted  that  in  the  case  of  "Ad- 
vance Taxes"  the  Cash  entry  precedes  the  Journal  entry,  and 
in  the  case  of  "Accrued  Taxes"  the  Journal  entry  comes  before 
the  Cash  entry. 

In  the  first  case,  an  asset  balance  is  set  up  bv  the  payment 
of  cash  in  advance,  and  in  the  second  case  a  liabi'lity  balance  is 
set  up  by  the  charging  up  monthly  to  "Taxes"  (a  Loss  and  Gain 
account)  the  amounts  for  which  the  business  has  become  lia- 
ble, but  for  which  the  date  of  payment  has  not  yet  arrived. 

Now  let  us  take  a  fairly  simple  case  and  follow  through 
the  necessary  Journal  and  Cash  entries. 

We  will  assume  that  the  several  tax  bills  cover  the  same 
year  and  that  this  year  and  the  company's  fiscal  year  coincide, 
and  that  the  tax  bills  are  paid  June  30  of  each  year. 

To  make  sure  that  I  am  understood,  I  give  the  following 
diagram: 


Jan.  1/03. 


Dec.  31/03. 


< 


Company's  Fiscal  Year. 


> 


^        Year  Covered  by  Tax  Bills. 

A 

<  Accrued  Taxes>  |  <  Advance  Taxes> 

V 


1 


■  Case  assumed. 


< 


Year  cove 


Bill  paid  June  30th. 
red  by  Tax  Bills. . 

Year  cover|ed  by  Tax  Bills. 


> 


< 


-> 


Cases 

not  as- 
sumed. 


The  last  two  cases  might  be  further  varied  by  showing 
more  or  less  of  the  tax  year  prior  to  January  1/03  (to  the  left 
of  the  January  i  vertical  line)  or  by  showing  more  or  less  subse- 


Lecture  Notes. 


151 


000.00 


000.00 


quent  to  December  31/03  (to  the  right  of  the  December  31  vertical 
line). 

Further  variations  could  be  introduced  by  indicating  differ- 
ent times  for  the  payment  of  the  tax  bills. 

In  the  case  we  have  assumed,  when  the  tax  bill  is  paid 
June  30,  one-half  of  the  payment  applies  to  the  prior  six  months 
and  the  other  half  to  the  subsequent  six  months. 

Now  suppose  we  are  carr>dng  into  our  Ledger  accounts 
each  month  all  items  of  loss  and  gain. 

Then  for  the  first  six  months  of  the  year  we  shall  have  to 
employ  the  Journal  entry: 

Taxes 

Accrued  taxes 
For  estimated  taxes  accrued,  but  not 

due,  applicable  to  month  of  (Jan.  or 

Feb.  or  Mch.  or  Apr.  or  May  or  , 

June)  being  i-i2th  of  $.  . .,  &c.,  &c. 

Then  by  the  end  of  June  we  shall  have  a  Dr.  balance  to 
"Taxes"  equal  to  one-half  of  the  total  yearly  charge  for  taxes 
(provided  our  estimate  was  correctly  made)  'and  a  Cr.  balance 
to  "Accrued  Taxes"  of  like  amount,  showing  the  liability  estab- 
lished. 

Now,  according  to  our  assumption,  the  tax  bills  are  paid 
June  30. 

Then  Cash  is  credited  for  the  total  amount  paid  and  one- 
half  is  debited  to  "Accrued  Taxes"  and  the  other  half  to  "Ad- 
vance Taxes." 

The  half  debited  to  "Accrued  Taxes"  wipes  out  the  Cn 
balance  which  has  been  built  up  by  the  monthly  Journal  entries! 
This  Cr.  balance  showed  that  the  business  was  liable  for  that 
amount  on  account  of  taxes  accrued.  But,  the  business,  through 
Cash,  now  pays  this  accrued  liability,  and  so  Cash  is  credited 
and  "Accrued  Taxes"  is  debited,  the  money  having  been  paid 
on  its  account.  So  the  records  are  now  clear  as  far  as  "Accrued 
Taxes"  account  is  concerned. 

The  other  half  of  the  Cash  payment,  debited  to  "Advance 


I 


152 


i 


Business  Engineering. 


000.00 


Taxes,    sets  up  an  asset  account.    It  gives  a  debit  balance  to 
J^1T.I    U^^'X   representing  „,oney   paid   out   in   advance 

r™  n^         r!  ^       t^^^  '"  '''^'"  *°  ^'  ^^"d^^ed  by  the  State, 
County  or  C.ty  in  the  way  of  police  protection,  fire  protection 
street  cleaning,  &c.,  &c.  pruieciion, 

This  balance  to  the  debit  of  "Advance  Taxes"  will  be  re- 
duced, month  by  month,  by  the  entry: 

Taxes 

Advance  taxes 

ooo.oo 

as  already  explained. 

w,•n.^^*'!^'".\°•^  '^'  ^'"'  "'""  successive  Journal  entries  will 
wipe  out  this  debit  balance. 

And  so  both  "Accrued  Taxes"  and  "Advance  Taxes"  will 
be  balanced  and  "Taxes"  will  show  a  debit  balance  representbg 
the  total  amount  of  taxes  for  the  year. 

By  this  method  each  month's  cost  has  taken  its  share  of 

of  th'e'tlx  b"r  ""'"'"'  °'  '"^  *^""*'°"  °'  "-"^  °^  P^^--' 

hf^  Tk         .      !      ^^'"  ^'~""'  f°^  "^^  ^^-^  ^^"W  have  only 
had  to  bear  the  charge  for  its  year's  taxes  ^ 

That  IS  true  in  the  case  assumed,  where  the  tax  year  and 

n  thr;H'"' '   '"'■   ''''  '°'"''"'''  ""*   '*   --'d   n't   be"o 
in  the  other  cases  more  likely  to  occur 

that  oToTtt' v5'  '".  '"'  '"'  '''  "^^^^  °f  P^y"-'  -^  -<^h 
that  part  of  the  bill  paid  prior  to  December  31  applies  to  the 

deVtT"!/"''-     l'^"'    ''    ^^P'^'"^'''    this    portion    will    b 
debited   "Advance   Taxes,"    Cash   taking   credit    for   the   tota! 

amount  paid.     Then  the  debit  balance  to^"Advanc    Taxes"  wH 
represent  as  many  twelfths  of  one  year's  taxes  as  there  have  bren 
months  paid  in  advance.     That  is,  as  many  twelfths  as  h  v^ 
not  been  wiped  out  by  the  monthly  Journal  entries  "Taxes  Dr 
to  Advance  Taxes"  made  subsequent  to  the  payment  of  "he  b^l  1 

This  balance  to  the  Dr.  of  "Advance  Taxes"  will  be  ca 
ned  over  on  the  Ledger  to  the  next  year  and  will  app  ar   n  the 
Balance  Sheet  of  January  i  as  an  asset. 


Lecture  Notes. 


153 


Now  suppose  that  the  tax  year  and  the  date  of  payment 
are  such  that  at  the  end  of  the  year  there  is  a  certain  portion  of 
the  year's  taxes  not  paid.  The  liability  has  accrued  but  the  bill 
to  include  these  months  will  not  be  due  and  payable  until  some 
time  in  the  company's  next  fiscal  year. 

Then  we  shall  have  a  Cr.  balance  to  "Accrued  Taxes"  built 
up  by  the  monthly  Journal  entries  "Taxes  Dr.  to  Accrued 
Taxes,"  representing  a  liability  for  so  many  twelfths  of  the  year's 
taxes  as  there  are  months  accrued. 

This  balance  to  the  Cr.  of  "Accrued  Taxes"  will  be  ear- 
ned over  on  the  Ledger  to  the  next  year  and  will  appear  in  the 
Balance  Sheet  of  January  i  as  a  LiabilUy.     As  already  explained 
when  during  the  subsequent  year,  the  tax  bill  is  paid.  Cash  will 
be  credited  for  the  total  amount  and  "Accrued  Taxes"  will  be 
debited  for  an  amount  equal  to  the  Cr.  balance,  which  balance 
will  include  the  amount  brought  over  from  the  previous  year 
To  further  illustrate  that  "Accrued  Taxes"  and  "Advance 
Taxes"  appearing  in  the  Balance  Sheet  of  January  i  will  repre- 
sent a  liability  and  an  asset   respectively,  we  may  consider  how 
Cash  will  be  influenced  by  these  accounts.     Suppose  there  is 
carried  over  to  the  next  year  a  certain  balance  to  Cr.  of  Accrued 
Taxes;   this  indicates  that  taxes  which  have  accrued  and  been 
charged  to  Tax  Account  as  part  of  the  year's  expense  have  not 
been  paid  and  therefore  the  cash  on  hand  as  indicated  by  the 
Dr.  balance  of  Cash  Account  is  that  much  larger  than  it  would 
have  been  if  this  debt  of  the  year  had  been  paid.     Hence  we 
must  show  a  liability  to  offset  the  additional  cash  on  hand  bv 
reason  of  this  debt. 

On  the  other  hand,  suppose  we  have  paid  taxes  in  advance 
for  a  number  of  months  of  the  next  year,  then  a  certain  amount 
will  have  been  taken  out  of  Cash  on  account  of  next  year  and 
the  asset  cash  will  be  correspondingly  reduced.  But  the  condi- 
tion of  the  business  as  of  January  i  is  the  same  as  though  the 
cash  had  not  been  paid  in  advance,  therefore  the  reduction  of 
the  asset  cash  is  made  good  by  the  equivalent  asset  of  Advance 
Taxes. 

I  have  been  asked,  what  happens  if  the    estimate  we  make 


r 
|- 

I 

I 
'4 


154 


Business  Engineering, 


for  the  entry  "Taxes  Dr.  to  Accrued  Taxes,"  is  not  correct?  In 
this,  as  in  many  other  instances,  we  have  to  base  our  Journal 
entries  on  estimate.  Here  comes  in  the  judgment  of  the  man 
of  business  and  here,  in  many  cases  must  come  in  the  judgment 
of  the  engineer.  In  case  of  a  mistake,  the  correction  must  be 
made  by  Journal  entry  to  correspond  with  the  facts.  As  already 
explained,  Depreciation  is  a  case  where  ver>'  likely  correcting 
entries  will  be  required  from  time  to  time. 

These  steps,  if  carefully  followed  through,  will  show  that  by 
the  double-entry  system  of  bookkeeping  we  can  make  the  accounts 
for  each  period  show  the  period's  proportion  of  all  items  of 
loss  and  gain  and  all  assets  and  liabilities.  It  will  be  seen  that 
if  we  guided  ourselves  only  by  the  entries  made  to  show  cash 
received  and  cash  disbursed,  this  would  not  be  the  case.  The 
transfer  of  cash  is  only  one  feature  of  a  commercial  transaction, 
and  in  some  transactions  cash  is  not  transferred  at  any  time. 


i  1 


ANALYSIS  OF  A  BALANCE  SHEET- 


December,  1904. 
While  I  appreciate  that  the  instruction  you  have  received 
in  accounting  as  given  in  these  notes  and  my  talks  has  not  been 
sufficient  for  a  full  command  of  the  principles  of  accounting 
and  the  methods  employed  in  double-entry  bookkeeping,  I  still 
think  that  with  the  specific  training  you  have  received  in  this 
line  and  the  general  training  in  the  line  of  straight  thinking 
which  you  have  received  at  "Stevens"  you  ought  to  be  able  to 
understand  the  following  analysis  of  a  trial  balance  and  a  balance 
sheet. 

Under  the  circumstances,  it  may  require  a  strong  and  sus- 
tained mental  effort  to  enable  you  to  comprehend  all  the  points 
I  shall  bring  out;  but  this  is  no  more  than  you  are  continually 
called  upon  to  do  in  connection  with  your  studies  on  the  techni- 
cal side  of  engineering  practice.  Let  me  encourage  you  to  make 
this  effort,  for  if  you  succeed  in  fully  comprehending  what  fol- 
lows it  means  that  you  will  have  secured  a  good  general  under- 
standing of  the  principles  of  accounting;  and  this  in  turn  means 
more  than  most  of  you  are  capable  of  appreciating  until  you 
have  studied  in  the  school  of  experience. 

For  greater  simplicity,  I  shall  consider  the  case  of  a  trading 
concern  rather  than  a  manufacturing  or  industrial  concern.  I 
shall  introduce  a  few  accounts  which  manifestly  combine  in- 
vestment and  speculative  characteristics,  to  better  enable  me 
to  make  the  distinction  between  the  Asset  and  Loss  accounts 
which  appear  on  the  Dr.  (left)  side  of  Ledger  and  between  the 
Liability  and  Gain  accounts  which  appear  on  the  Cr.  (right) 
side  of  Ledger.  I  refer  to  the  following  accounts:  Phoenix 
Gas  Bonds,  Norfolk  &  Western  R.  R.  Stock,  and  Erie  R.  R. 
Stock.  Of  course,  the  business  as  a  whole  is  more  or  less  specu- 
lative, as  merchandise  is  liable  to  fluctuate  in  value  while  in  our 


i''| 

m 


r  i 


hi 

1  n  '* 


I 


>■  I 

*  ■ 

I 
t3 


%S 


i' 


156 


Business  Engineering. 


possession  and  there  are  other  speculative  chances  which  must 
be  taken  in  this,  as  in  every  other  business. 


Trial  Balance 


I 

D< 


December  31,  1903. 
(Showing  the  Dr.  and  Cr.  balances  of  all  the  accounts  in  the 
Ledger,  taken  off  before  closing  the  books:  that  is,  before  car- 
rying into  Loss  and  Gain  Account  the  several  loss  and  gain 
items  of  the  fiscal  year  ended  December  31,  1903.) 


Dr. 

Expense  General, $965.89 

Advertising  3,000.00 

Salaries  and  Wages 12,600.00 

Salary  bonuses 500.00 

Traveling  Expense   8,675.87 

Agents'  Commissions 9,764.76 

Interest  Account 845.65 

Store  and  Office  Expense 6,576.83 

Bad  Bills  785.00 

Cash   8,675.64 

Merchandise  Stock    13,874.25 

Store  and  Office  Furniture 3,184.27 

Phoenix  Gas  Bonds,  3/m 2,800.00 

Norfolk  &  Western  R.  R.  Stock, 

25  Shares 1,450.00 

Real  Estate  4,500.00 

Advance  Interest  650.00 

Interest  Receivable   3^5 .45 

Bills  Receivable  5,000.00 

Accounts  Receivable 6,745 .87 

Merchandise   

Erie  R.  R.  Stock 

J.  E.  Thomas,  Capital  Account. . 
W.  L.  Sharp         "  "      .. 

J.  R  Thomas,  Personal  Account 


Cr. 


$60,650 .  25 

560.40 

5,000.00 

5,000 .  00 

3>846.84 


Lecture  Notes. 


157 


Dr. 


W.  L.  Sharp,  Personal  Account. 

Interest  Payable 

Salaries  Payable 

Accounts  Payable  

Bills  Payable 


Cr. 

$2,789.15 

465.00 

1,540.00 

4,567.84 
6,500.00 


$90,919.48         $90,919.48 


Journal — Closing  Entries. 

t 

(Being  the  entries  made  in  the  Journal  as  a  basis  for  transferring 
to  Loss  and  Gain  Account  the  several  loss  and  gain  items 
shown  on  the  Trial  Balance.) 

Dec.  31/03. 

Dr.  Cr. 

Loss  and  Gain  Dr $44,087 .  00 

To  Sundries, 

Expense  General   $965 .89 

Advertising   3,000.00 

Salaries  and  Wages 12,600.00 

Salary  Bonuses 500.00 

Traveling  Expense 8,675 .87 

Agents'  Commissions   9,764 .  76 

Interest  Account  845 .  65 

Difference  between  all  in- 
terest debits  and  credits. 

Store  and  Office  Expense..  6,576.83 

Bad  Bills  785.00 

Store  and  Office  Furniture.  95-52 
3%  for  depreciation. 

Merchandise  Stock 277.48 

2%  for  depreciation. 


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^58  Business  Engineering. 

Dec.  31/03. 

Sundries  Dr. 

to  Loss  and  Gain 

Merchandise   $60,650.25 

Eric  R.  R.  Stock 560.40 

(profit  on  30  shares.) 


$61,210.65 


Note.— The  net  profit  of  $17,123.65  as  shown  by  the  Loss 
and  Gain  Account  (following)  after  posting  above  two  entries,  is 
now  distributed  to  the  two  partners'  personal  accounts  as  shown 
by  the  following  Journal  entry: 
Dec.  31/03. 

Loss  and  Gain $17,123.65 

J.  E.  Thomas,  personal  account  $8,561 .83 

W.  L.  Sharp,        "  "  8,'56i.82 

The  above  three  entries  are  made  to  close  the  books  for 
the  year  ending  December  31,  1903. 


Notes.— In  the  simple  case  here  shown  Loss  and  Gain  Ac- 
count is  used  only  at  end  of  fiscal  period  ia  determining  the  net 
result  (loss  or  gain)  of  the  business  for  the  fiscal  period,  the 
profit  or  loss  being  then  divided  equally  between  the  two  part- 
ners, which  again  closes  Loss  and  Gain  Account. 

In  the  first  two  Journal  entries  the  facts  could  be  correctly 
shown  without  including  the  words  "Sundries,"  and  even  with- 
out including  ''Dr."  and  "to." 

In  the  first  entry  the  form  then  would  be: 

Loss  and  Gain. 


Expense  General 
Advertising 
&c. 

Merchandise 
Erie  R.  R.  Stock 
&c. 

Loss  and  Gain. 


and  in  the  second  entry 


Lecture  Notes.  159 

The  third  entry  I  have  made  in  the  simpler  form  as  an 
additional  illustration  of  how  the  bookkeeping  method  or  form 
can  be  varied  without  involving  any  essential. 

Loss  AND  Gain  Account. 

Dr.  Cr. 

(From  the  Ledger.) 

Expense  General $965 .89 

Advertising   3,000 ,  qq 

Salaries  and  Wages 12,600.00 

Salary  Bonuses 500 .  00 

Traveling  Expense 8,675 .87 

Agents'  Commissions 9,764 .  76 

Interest  Account  845 .  65 

Difference  between  all  interest 
debits  and  credits. 

Store  and  Office  Expense 6,576.83 

Bad  Bills  785.00 

Store  and  Office  Furniture  3  % . .  95-52 

Merchandise  Stock  2  % 277.48 

For  depreciation. 

Merchandise    $60,650.25 

Erie  R.  R.  Stock,  (profit  on  30 

shares)   560.40 

Balance  carried  down  Profit..  17,123.65 


$61,210.65         $61,210.65 


Balance  brought  down — Profit 

for  Term  $17,123.65 

Note. — Above  shows  the  Loss  and  Gain  Account  in  the 
Ledger  after  posting  the  first  two  Journal  entries  and  before 
posting  the  third  entry  crediting  $8,561.83  to  J.  E.  Thomas  Per- 
sonal Account  and  $8,561.82  to  W.  L.  Sharp  Personal  Account. 
The  posting  of  this  last  entry  would  balance  the  Loss  and  Gain 
Account. 


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Business  Engineering. 


It  is  assumed  that  there  was  no  Loss  and   Gain  balance 
brought  over  from  the  previous  fiscal  year. 

Balance  Sheet. 

January  i,  1904. 
(After  postmg  all  the  closing  entries  from  the  Journal.) 
Assets: 

^^^^  $8,675.64 

Merchandise   Stock 13,596.77 

($13,874.25). 
(     277.48). 
Store  &  Office  Furn 3,o88. 75 

($3,184.27), 

Fhoenix  Gas  Bonds  (3/m) 2,800.00 

Norfolk  &  Western  R.  R.  Stock 

(25  shrs.) 1,450.00 

Real  Estate 4,500.00 

Advance  Interest  (on  B/P) 650.00 

Interest  Receivable ^2q  4? 

(On  Bills  Rcc 1275.45) 

(On    Phoenix    Bonds 50.00) 

Bills  Receivable   5,000.00 

Accounts  Receivable 6,745.87 

Liabilities: 
J.  E.  Thomas,  Capital  Account. .  c  qoo  00 

W.  L.  Sharp,      "  ''       . .  5,'ooo*oo 

J.  E.  Thomas,  Personal  Account.  i2,'4o8.67 

($3,846.84) 

(8,561.83) 
W.  L.  Sharp,  Personal  Account.  11,350.97 

($2,789.15) 
( 8,561.82) 

Interest  Payable ^^^  ^ 

Salaries  Payable 1,540.00 

Accounts  Payable 4,567.84 

Bills  Payable ^j^.^ 

$46,832.48  $46,832.48 


Lecture  Notes. 


161 


I  first  show  a  Trial  Balance  taken  from  the  Ledger  at  the 
end  of  the  business  day,  December  31,  1903.  If  not  actually 
taken  off  at  that  time,  it  is  taken  as  of  that  date:— that  is,  any 
transactions  which  have  occurred  between  that  date  and  the 
time  the  Trial  Balance  was  taken  are  not  posted  into  the  Ledger 
until  the  transactions  for  the  year  1903— which  we  assume  to 
be  coincident  with  the  fiscal  year— have  been  finally  adjusted 
preparatory  to  the  books  being  reopened  for  the  year  1904,  or, 
if  they  have  been  posted,  the  work  has  been  done  so  as  not  t(> 
mix  the  entries  of  1904  with  those  of  the  previous  year. 

Next  1  show  the  Journal  entries  required  to  close  the  books 
for  the  year  just  ended. 

In  these  entries  all  the  items  of  loss  and  gain  are  transferred 
to  Loss  and  Gain  Account,  so  obtaining  a  summary  and  balanc- 
ing of  these  several  items.  One  entry  charges  or  debits  Loss 
and  Gain  Account  for  the  sum  of  all  the  items  of  expense  or 
loss,  and  at  the  same  time  credits  each  expense  or  loss  account 
with  the  amount  of  its  debit  balance  so  that  there  shall  not  be  a 
duplication  of  these  debit  items.  The  next  entry  credits  to 
Loss  and  Gain  Account  the  sum  of  all  the  items  of  gain  and  at 
the  same  time  debits  each  gain  account  with  the  amount  of  its 
credit  balance  so  that  there  shall  not  be  a  duplication  of  these 
credit  items.  The  third  entry  credits  to  each  of  the  two  part- 
ners, J.  E.  Thomas  and  W.  L.  Sharp,  one-half  of  the  net  credit 
balance  of  Loss  and  Gain  Account  resulting  from  the  posting  of 
the  first  two  Journal  entries. 

Next  is  shown  Loss  and  Gain  Account  as  it  appears  in  the 
Ledger  after  posting  the  first  two  Journal  entries  and  before 
posting  the  third  entry. 

Finally  comes  the  Balance  Sheet  from  the  Ledger  showing 
the  balances  of  all  accounts  after  all  the  Journal  closing  entries 
have  been  posted.  The  items  on  this  sheet  are  the  balances 
brought  down  in  the  Ledger  after  posting  all  three  of  the  closing 
Journal  entries  and  after  ruling  off  the  accounts,  reopening 
the  accounts  for  the  next  year. 

Your  task  now  is  to  arrive  at  an  understanding  of  the 
Balance  Sheet  as  derived  from  the  Trial  Balance.     To  assist  you 


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Business  Engineering. 


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in  this  I -show  in  parentheses  on  the  Balance  Sheet  against  some 
of  the  accounts  certain  subtractions  and  additions  which  will 
serve  to  point  out  how  these  balances  have  been  derived  from 
the  balances  shown  on  the  Trial  Balance.  These  parentheses 
are  not  part  of  the  Balance  Sheet. 

For  instance,  on  the  Trial  Balance  we  find  13,874.25  to 
the  debit  of  Merchandise  Stock.  That  represents  the  amount 
invested  in  that  portion  of  the  merchandise  purchased  which 
remains  unsold  at  the  end  of  the  year.  Now  in  connection 
with  the  settlement  of  the  firm's  accounts  for  the  year  it  is 
decided  after  full  consideration  of  all  the  facts  available  that 
there  should  be  written  off  to  Loss  and  Gain  Account  for  the 
year  2  per  cent,  of  the  book  value  of  the  stock  of  merchandise. 
So  in  the  Journal  entry  "Loss  and  Gain  Account  Dr.  to  Sun- 
dries," we  find  depreciation  included  as  one  of  the  Sundry  items 
and  under  this  head  there  is  $277.48,  which  is  2  per  cent,  of 
13,874.25.  In  the  Balance  Sheet  the  reduced  and  present  value 
of  Merchandise  Stock  is  shown  as  (13,874.25  —  277.48=) 
^369^-77*  being  the  previous  debit  balance  as  shown  on  the 
Trial  Balance,  reduced  by  the  credit  for  depreciation  of  $277.48. 
This  subtraction  is  shown  in  the  Balance  Sheet  in  parentheses 
against  the  item,  Merchandise  Stock. 

Also,  against  the  items  Store  and  Office  Furniture,  Interest 
Receivable,  J.  E.  Thomas  Personal  Account  and  W.  L.  Sharp 
Personal  Account,  are  shown  in  parentheses  subtractions  or 
additions  to  indicate  how  these  items  have  been  derived  from  the 
items  in  the  Trial  Balance. 

If  you  will  study  the  Trial  Balance  in  connection  with  the 
Journal  closing  entries  you  will  see  that  on  the  Dr.  side  there 
are  accounts  which  represent  assets  and  other  accounts  which 
represent  losses;  and  on  the  Cr.  side  there  are  accounts  which 
represent  liabilities  and  others  which  represent  gains. 

Here,  at  first,  there  seems  to  be  a  contradiction. 

The  following  rules,  which  I  have  before  brought  to  your 
attention,  help  to  explain  this  seeming  contradiction,  and  if  you 
will  apply  them  every  time  you  have  an  opportunity  to  study  a 


Lecture  Notes. 


163 


Trial  Balance,  you  will  find  that  your  understanding  of  account- 
mg  and  bookkeeping  methods  will  rapidly  increase. 

Too  often  rules  do  not  explain ;   here  is  an  exception. 

1.  An  item  on  the  left  or  Dr.  side  of  the  Ledger 

{a)  is  an  Asset  if  the  amount  eventually  will  be  received; 
{b)  is  a  Loss  if  the  amount  eventually  will  not  be  received. 

2.  An  item  on  the  right  or  Cr.  side  of  the  Ledger 

{a)  is  a  Liability  if  the  amount  will  have  to  be  paid  eventu- 
ally; 

{b)  is  a  Gain  if  the  amount  will  not  have  to  be  paid  eventu- 
ally. 

To  put  it  a  little  differently: 

If  we  have  paid  out  money  and  it  is  to  be  returned  to  us 
say  by  the  sale  of  the  thing  in  which  the  money  has  been 
invested,  then  the  balance  to  the  Dr.  of  the  account  involved 
represents  an  Asset. 

If,  on  the  other  hand,  we  have  paid  out  money  which  is 
not  to  be  returned  to  us,  it  must  be  considered  as  a  Loss. 

If  money  has  been  paid  to  us  and  we  have  to  pay  it  back 
then  the  balance  to  the  Cr.  of  the  account  involved  represents  a 
Liability. 

If,  on  the  other  hand,  we  do  not  have  to  pay  it  back    it 
represents  a  Gain.  ' 

In  connection  with  the  Journal  closing  entries,  apply  these 
rules  m  analyzing  the  Trial  Balance  and  Balance  Sheet. 

The  Trial  Balance  shows  us  items  of  assets  and  losses  on 
the  Dr.  side  and  liabilities  and  gains  on  the  Cr.  side. 

But  in  closing  the  books  for  the  year  we  have' carried  into 
Loss  and  Gam  Account  all  the  Loss  and  Gain  items  and  the 
net  profit  has  been  distributed  between  the  accounts  of  the  two 
partners  and  so  now  appears  as  two  liability  items. 

Thus  we  find  on  the  Dr.  side  of  the  Balance  Sheet  only 
asset  Items,  representing  the  property  or  things  in  which  capital 
IS  mvested  and  on  the  Cr.  side  only  liability  items  showing  from 
what  persons  or  things  the  business  has  received  its  capital. 

If  the  analysis  is  carried  further  it  will  be  seen  that  certain 
of  the  accounts  on  the  Dr.  side  of  the  Trial  Balance  in  part 


:*i 


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164 


Business  Engineering. 


represent  assets  and  in  part  losses.  For  instance,  consider  Mer- 
chandise Stock  Account  as  already  referred  to.  The  Dr.  balance 
of  Merchandise  Stock  Account  as  shown  on  the  Trial  Balance  is 
13,874.25.  But  we  have  seen  that  $277.48  is  an  item  of  loss 
through  depreciation  and  that  Merchandise  Stock  as  an  asset 
account  is  reduced  to  13,596.77,  as  shown  by  the  Balance  Sheet. 

In  the  same  way  it  can  be  seen  that  Store  and  Office  Furni- 
ture Account  as  shown  on  the  Trial  Balance  is  in  part  a  loss 
account  and  in  part  an  asset  account. 

We  also  see  that  certain  of  the  operating  accounts  are  also 
included  in  the  statements  of  Assets  and  Liabilities  as  shown  by 
the  Balance  Sheet. 

For  instance,  among  the  assets  (Dr.  side)  we  find  Interest 
Receivable  $325.45.  This  had  been  earned,  but  the  time  for  its 
payment  had  not  arrived.  Still  it  is  carried  into  Loss  and 
Gain  Account  as  one  of  the  gains  of  the  year.  It  is  assumed 
that  this  amount  will  be  received  during  the  next  year,  so  it  is 
taken  as  an  asset.  When  received,  it  will  be  credited  to  Interest 
Receivable,  so  wiping  out  this  debit,  and  will  not  again  appear 
as  a  gain  in  the  Loss  and  Gain  Account  of  the  next  year.  The 
Loss  and  Gain  feature  of  this  amount  has  been  taken  care  of 
once  for  all  and  now  it  only  has  to  do  with  the  Asset  and  Lia- 
bility feature  of  the  business. 

On  the  other  side,  we  find  Salaries  Payable  $1,540,  repre- 
senting salaries  which  at  the  end  of  the  year  had  been  earned 
but  which  had  not  been  paid.     It  is  therefore  a  liability. 

Coming  now  to  the  Securities  Investment  Accounts,  we  find 
on  the  Trial  Balance  and  Balance  Sheet  the  Phoenix  Gas  Bond 
Account  debited  with  $2,800,  which  means  that  $2,800  has  been 
invested  in  those  bonds.  That  is  therefore  an  asset  account. 
If  later  the  bonds  are  sold  for  less  than  the  cost,  the  difference 
will  be  charged  up  as  one  of  the  items  of  loss;  if  sold  for  more 
than  cost,  the  difference  will  be  credited  as  one  of  the  items  of 


gain. 


This   applies   also  to  the   Norfolk   and   Western   Railroad 
Stock  Account. 

But  on  the  Cr.  side  of  the  Trial  Balance  we  find  the  item 


Lecture  Notes. 


165 


of  Erie  Railroad  Stock  $560.40.  This  item  does  not  appear  on 
the  Balance  Sheet.  In  the  Journal  entries  we  find  this  item  in- 
cluded as  one  of  the  gains  of  the  year,  it  being  the  profit  on 
30  shares  of  Erie  Railroad  stock.  When  the  stock  was  pur- 
chased, the  amount  paid  was  posted  from  the  Cr.  side  of  Cash 
to  the  Dr.  of  Erie  Railroad  Stock  Account.  When  the  stock 
was  sold,  the  amount  received  therefor  was  posted  from  the  Dr. 
side  of  Cash  to  the  Cr.  of  this  account;  and  as  the  amount 
received  exceeded  the  cost  by  $560.40  a  Cr.  balance  of  this 
amount  was  found  in  this  account  when  the  Trial  Balance  was 
taken  off.  So  here  is  an  account  which  formerly  appeared  on 
the  Dr.  side  of  the  Balance  Sheet,  as  representing  an  asset,  now 
appearing  on  the  Cr.  side  of  the  Trial  Balance  as  representing 
a  gain. 

Now,  let  us  test  the  items  on  the  Trial  Balance  by  the  rules 
I  have  given  for  distinguishing  between  Assets  and  Losses  on 
the  Dr.  side  and  between  Liabilities  and  Gains  on  the  Cr. 
side. 

The  first  nine  items  on  the  Dr.  side  are  losses,  for  they  will 
not  be  received. 

The  next  item.  Cash,  can  be  claimed  at  any  time,  and  it  is 
an  asset. 

The  next  item.  Merchandise  Stock,  is  an  asset  so  far  as  we 
believe  it  will  be  received  and  a  loss  to  the  extent  that  the 
amount  debited  to  the  account  is  in  excess  of  the  amount  we 
estimate  will  be  received;  all  as  before  explained. 

Store  and  Office  Furniture  is  part  asset  and  part  loss,  as 
in  the  case  of  Merchandise  Stock. 

Phoenix  Gas  Bonds  is  an  asset  account,  as  no  reason  ap- 
pears for  believing  that  the  amount  to  Dr.  of  the  account  is  in 
excess  of  the  value  of  the  bonds  represented. 

Real  Estate  is  an  asset  account  as  representing  real  estate 
worth  $4,500. 

Advance  Interest  is  an  asset  account,  as  it  represents  the 
payment  in  advance  for  the  use  of  money.  If  the  loan  were 
cancelled  December  31,  1903,  we  can  assume  that  this  $650 
would  be  returned.     If  the  loan  is  not  cancelled  we  can  assume 


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Business  Engineering. 


that  this  $650  will  be  received  through  the  use  of  the  money 
on  which  this  advance  interest  has  been  paid. 

The  next  three  items  represent  amounts  to  be  received,  and 
are  therefore  asset  accounts. 

Turning  now  to  the  Balance  Sheet,  we  find  the  first  nine 
accounts  do  not  appear  as  they  are  loss  accounts,  but  the  last 
ten  do  appear  as  asset  accounts,  though  Merchandise  Stock  and 
Store  and  Office  Furniture  in  reduced  amounts,  as  explained. 

Coming  back  to  the  Trial  Balance,  the  first  item  we  find 
on  the  Cr,  side  is  Merchandise.  This  will  not  have  to  be  paid, 
for  it  represents  the  year's  profits  made  in  the  purchase  and 
sale  of  merchandise;   it  is  therefore  a  gain. 

Erie  Railroad  Stock,  for  the  same  reason,  represents  a  gain. 
The  next  two  accounts  represent  the  amounts  loaned  to 
the  business  by  the  two  partners.     These  amounts  will  eventually 
have  to  be  paid,  and  therefore  represent  liabilities. 

The  next  two  accounts  represent  the  profits  credited  to  the 
partners  which  have  not  yet  been  withdrawn.  These  amounts 
will  have  to  be  paid,  and  are  therefore  liabilities. 

The  next  two  accounts  represent  amounts  which  have  been 
earned  against  the  business  but  have  not  yet  been  paid ;  eventu- 
ally they  will  have  to  be  paid,  so  they  are  liabilities. 

The  next  item  represents  approved  accounts  for  services  we 
have  accepted  or  for  goods  we  have  used  or  have  on  hand. 
These  accounts  must  be  paid,  so  "Accounts  Payable"  represents 
a  liability. 

The  next  account.  Bills  Payable,  represents  notes  which  we 
have  issued  in  payment  for  services  or  goods,  and  as  these  notes 
must  be  paid,  the  account  represents  a  liability. 

Turning  again  to  the  Balance  Sheet,  we  do  not  find  the 
items  "Merchandise"  and  "Erie  Railroad  Stock,"  the  two  gain 
accounts,  for  they  have  been  carried  into  Loss  and  Gain  Ac- 
count, but  we  do  find  the  last  eight  accounts  representing  items 
of  liability. 

Finally,  it  must  be  understood  that  the  condition  of  the 
business  has  not  been  altered  by  the  changes  which  are  shown 
by  a  comparison  of  the  Trial  Balance  with  the  Balance  Sheet. 


Lecture  Notes. 


167 


Since  the  Trial  Balance  was  taken  off  there  have  been  no  further 
business  transactions,  or  if  there  have  been  any,  they  have  not 
been  taken  into  account  in  preparing  the  Balance  Sheet.  Cer- 
tain adjustments  for  depreciation  and  the  like  have  been  made. 
The  facts  as  they  before  existed  have  been  acknowledged  and 
recorded.  The  differences  between  the  Trial  Balance  and  the 
Balance  Sheet  result  from  bringing  together  all  the  loss  and 
gain  items,  balancing  them  against  each  other  in  Loss  and 
Gain  Account,  and  the  crediting  to  each  of  the  partners*  per- 
sonal accounts  one-half  of  the  credit  balance  to  Loss  and  Gain 
Account  obtained  by  deducting  the  sum  of  the  loss  items  from 
the  sum  of  the  gain  items. 

Having  so  closed  the  books  and  ruled  off  the  accounts  in 
which  the  sum  of  the  debits  equals  the  sum  of  the  credits,  and 
brought  down  all  the  Dr.  and  Cr.  balances  in  the  case  of  ac- 
counts in  which  the  sum  of  the  debit  items  and  the  sum  of  the 
credit  items  are  not  equal,  the  books  are  ready  to  receive  the 
entries  for  1904  and  now  the  loss  and  gain  accounts  will  be  re- 
opened. 


The  case  I  have  taken  as  an  example  is  a  very  simple  one. 

It  can  readily  be  seen  that,  in  a  manufacturing  business,  the 
accounting  and  bookkeeping  complications  are  greatly  in- 
creased. 

In  the  case  of  a  large  manufacturing  concern  it  would  be 
necessary  to  keep  the  books  so  that  all  steps  in  each  branch 
of  manufacture  would  be  cleariy  represented  in  the  accounts. 
To  this  end  the  accounts  would  be  divided  and  sub-divided  so 
that  the  items  of  cost  would  be  classified  to  correspond  to  our 
proposed  analysis  of  costs.  A  scheme  of  classification  which 
thus  multiplies  the  number  of  accounts  to  provide  the  means 
for  ready  and  accurate  analysis  of  costs  may  be  considered  com- 
plicated and  burdensome  by  the  bookkeeping  department,  and 
is  frequently  objected  to  by  bookkeepers  on  that  score.  It  is 
then  to  be  remembered  that  in  the  case  of  a  large  business  it 
pays  to  so  increase  the  labor  and  expense  of  the  bookkeeping 
department  provided  the  manager  and  his  assistants  are  thus 


W"' 


r' 


i68 


Business  Engineering. 


provided  with  the  facilities  for  constantly  keeping  themselves  in- 
formed in  the  minutest  detail  of  the  cost  of  operation.  For  a 
concern  doing  a  large  and  complicated  business  nothing  could 
be  more  complicated  than  a  condensed  classification  of  accounts, 
for  the  analysis  of  costs  could  then  be  effected  only  by  picking 
out  of  these  condensed  accounts,  item  by  item,  the  information 
required.  This  should  be  provided  for  in  advance  through  the 
adoption  of  an  extended  scheme  of  classification  designed  to 
present  the  business  records  in  the  most  complete  and  con- 
venient form  for  the  information  of  the  management  at  any  and 
all  times. 

I  hope  we  may  have  time  to  take  up  this  branch  of  our  sub- 
ject in  connection  with  a  consideration  of  store-room  inventories 
and  shop  cost. 


■% 


ANALYSIS  OF  DATA. 

December,  1904. 
In  this  course  of  lectures  on  some  of  the  features  of  engi- 
neermg  practice,  I  wish  to  give  at  least  brief  attention  to  the 
important  subject  of  analysis  of  data. 

In  your  professional  work  you  will  continually  be  called 
upon  to  refer  to  the  record  of  experiences  and  opinions  of 
others.  You  will  consult  text  books,  the  transactions  of  techni- 
cal societies  and  other  authorities  more  or  less  qualified.  Before 
accepting  data,  and  especially  so  when  some  definite  question  is 
at  issue,  you  should  form  an  opinion  as  to  its  reliability  and 
comprehensiveness. 

In  collecting  your  evidence  you  will  have  to  deal  with  con- 
flictmg,  or  apparently  conflicting,  statements.  First,  you  should 
determine  whether  or  not  the  statements  are  conflicting,  and  if 
you  so  decide  you  must  then  determine  their  relative '  values 
Frequently,  a  careful  analysis  will  show  that  there  is  no  real 
conflict,  for  the  statements  do  not  cover  exactly  the  same 
ground,  and,  therefore,  cannot  be  fairly  compared. 

I  have  already  pointed  out  to  you  the  danger  of  accepting 
any  partial  or  incomplete  statements.  I  have  told  you  of  in- 
stances in  my  own  experience  where  partial  statements  of  two 
or  more  men,  of  acknowledged  repute  as  experts  in  their  line 
and  reputed  to  be  honest,  had  been  so  combined  as  to  give  an' 
apparently  complete  certificate  of  good  character  to  some  proc- 
ess or  device.  In  many  of  these  cases,  my  investigations  have 
shown  that  these  statements,  which,  when  combined,  appeared 
to  offer  a  sufficient  guaranty  of  efficiency,  had  not  been  pre- 
pared  as  the  result  of  coincident  investigations,  and,  therefore 
were  worthless  when  so  combined  to  form  a  complete  record. 

I  think  of  an  instance  where  two  such  partial  statements 
were  signed  by  two  professors  of  a  college  of  engineering  of 
the   first   rank.     One   certificate   furnished   a   most   satisfactory 


1 


170 


Business  Engineering. 


verification  of  the  claims  made  as  far  as  quantity  of  product 
was  concerned,  and  the  other  furnished  an  equally  satisfactory 
verification  of  the  claims  as  to  quality.  The  adroit  promoter 
had  so  combined  these  two  statements  in  the  prospectus  of  the 
company  as  to  satisfy  the  ordinary  investor  so  that  he  was  will- 
ing to  risk  his  money  in  the  venture.  These  professors,  as 
ordinarily  careful  and  intelligent  men,  should  have  known  that 
the  claims  made  for  the  process — considering  both  quantity  and 
quality— were  impossible  of  accomplishment,  and  that  to  obtain 
the  results  claimed  would  furnish  a  demonstration  of  perpetual 
motion.  And,  yet,  these  professors  were  each  willing  to  give  a 
certificate  for  the  isolated  results  as  they  saw  them  without 
going  deeper  into  the  subject.  My  own  investigations  proved 
that  if  the  result  as  to  quantity  was  obtained,  then  it  was  im- 
possible to  verify  the  claim  as  to  quality,  or  if  the  claim  as  to 
quality  was  verified,  the  claim  as  to  quantity  was  impossible 
of  verification.  I  could  cite  many  such  cases  from  my  profes- 
sional experiences. 

This  all  indicates  that  in  the  analysis  of  data  we  must  be 
careful  to  include  in  our  investigations  all  the  points  involved; 
especially  we  cannot  safely  take  any  isolated  statements  or  even 
any  isolated  facts.  We  must  read  every  statement  with  its 
context,  and,  as  honest  and  intelligent  men,  if  we  quote  a  state- 
ment of  fact,  or  opinion,  we  should  quote  that  statement  with 
its  context,  and  we  should  ourselves  be  careful  to  bear  in  mind 
the  context. 

Take,  for  instance,  a  case  in  my  own  special  line  of  work 

gas  engineering.  We  frequently  find  comparisons  made  of  gas 
leakage  on  the  basis  of  per  cent,  of  output.  In  one  city,  the 
leakage  (so  called)  may  be  5  per  cent,  of  the  total  output; 
whereas,  in  another  city,  the  leakage  may  be  10  per  cent,  of 
the  output,  and  still,  the  latter  may,  upon  even  superficial  investi- 
gation, indicate  greater  efficiency  of  plant  and  management. 
This  may  be  readily  seen.  Suppose  we  have  two  companies, 
A  and  B,  with  exactly  the  same  mileage  of  mains  and  exactly 
the  same  leakage,  as  measured  by  the  per  cent,  of  volume  sent 
out  or  as  delivered  to  the  mains.     But  we  find  that  A  is  sending 


Lecture  Notes. 


171 


out  twice  as  much  gas  as  B.  Or,  to  be  more  definite,  let  us 
suppose  that  A  is  sending  out  200,000,000  cubic  feet  per  annum; 
whereas  B  is  sending  out  only  100,000,000  cubic  feet  per  annum. 
Let  us  suppose,  further,  that  the  leakage  in  each  case  is  5  p€r 
cent,  of  the  output.  Then,  the  actual  amount  of  loss  by  leakage 
in  the  case  of  A  is  10,000,000  cubic  feet  per  annum;  whereas 
the  loss  of  B  is  only  5,000,000.  So  we  find  that  B's  leakage  is 
only  one-half  the  leakage  of  A,  in  spite  of  the  fact  that  by 
the  statement  in  the  form  of  per  cent,  the  leakages  are  equal. 

To  still  more  completely  show  that  leakage  of  several  com- 
panies cannot  be  compared  on  the  basis  of  per  cent,  of  output, 
suppose  we  have  a  company  which  has  just  completed  its  main 
system  and  turned  the  gas  into  its  mains  but  has  not  yet  con- 
nected up  the  mains  to  any  of  its  consumers'  meters.  In  this 
case,  all  the  gas  that  passes  from  the  mains  would  be  leakage, 
and  hence  the  leakage  would  be  100  per  cent. 

In  spite  of  the  facts  here  shown,  there  are  many  people  in 
the  gas  business  who  make  their  leakage  comparisons  on  the 
per  cent,  basis.  For  instance,  they  see  that  a  certain  company 
has  a  leakage  of  5  per  cent,  of  its  output  and  they  are,  therefore, 
satisfied  that  the  mains  are  in  fairly  good  condition  and  that 
the  management  is  satisfactory.  They  see  another  case  where 
the  leakage  is  10  per  cent,  and  they  assume  that  the  mains  are 
in  unsatisfactory  condition;  whereas  it  is  quite  possible  that,  in 
the  latter  case,  the  distributing  plant  is  in  better  condition  than 
that  of  the  first  case.  The  large  p^r  cent,  of  leakage  may,  of 
course,  indicate  that  fault  may  be  found  with  the  sales  depart- 
ment, but  the  efficiencies  of  the  two  departments  are  not  to  be 
confounded. 

V  This  leads  me  to  point  out  that  the  intelligent  analysis  of 
data  is  required  when  we  are  attempting  to  make  comparisons 
between  the  efficiencies  of  management  of  the  several  depart- 
ments of  a  single  concern.  In  connection  with  my  talks  on 
accounting,  I  have  tried  to  impress  upon  you  the  fact  that  if 
we  are  to  obtain  the  most  economical  management  through 
the  many  steps  included  in  operation,  we  must  be  able  to  deter- 
mine through  a  systematic  statement  of  items  of  cost  exactly 


172 


Business  Engineering. 


where  there  is  room  for  improvement  and  where  we  may,  at 
least  for  the  present,  be  satisfied  with  the  result  obtained; 'so, 
m  connection  with  our  present  subject,  we  must  be  prepared 
through  a  careful  consideration  of  all  data  available  to  deter- 
mme  as  to  the   relative  efficiency  of  the  management  of  the 
various  departments  of  any  business  in  which  we  may  be  con- 
cerned.    I  am  reminded  of  something  that  happened  some  years 
ago.     I  shall  not  go  into  the  details,  but  it  is  sufficient  to  say 
that  m  connection  with  the  arguments  made  from  time  to  time 
for  the  introduction  of  an  improved  form  of  retort  furnace  and 
settmg,  an  old  engineer  in  charge  of  one  of  the  largest  plants 
in  the  country  repeatedly  stated  that  his  old  benches,  antiquated 
m  design,  cost  him  much  less  money  to  install  and  were  giving 
just  as  good  results  as  those  claimed  for  this  new  and  more 
expensive  form.     His  works  later  came  under  my  management 
and  I  then  found  that  there  was  apparently  a  very  large  leakage 
amountmg  to  about  33  per  cent,  of  the  output.     Investigation 
proved  that  the  mains  were  in  better  condition  than  any  other 
part  of  the  plant  and  the  superintendent  of  the  mains  was  the 
most  efficient  official  in  the  company's  service.     The  explanation 
of  this  apparent  conflict  in  the  facts  was  suggested  when  I  dis- 
covered that  the  statement  of  the  amount  of  gas  manufactured 
was  obtained  by  a  system  of  estimating.     There  was  not  suf- 
ficient  station  meter  capacity  to  register  the  total  amount  made, 
so  from  time  to  time  experimental  runs  were  made    the  gas 
being  measured  through  a  small  meter.     The  total  coal  car- 
bonized was  credited  with  the  rate  of  production  established  by 
these  experiments.     Further  investigation  proved  that  these  ex- 
perimental or  test  runs  were  entirely  unreliable  as  a  basis  of 
estimate.     As  soon  as  the  gas  was  correctly  measured  the  state- 
ment of  gas  produced  was  materially  reduced,  and  so  the  state- 
ment of  the  amount  sent  into  the  mains  was  reduced,  and  in  turn 
the  per  cent,  of  leakage  was  reduced.     Thus  it  was  shown  that 
the  management  of  the  works  was  much  less  efficient  than  the 
records  had  indicated,  while  the  management  of  the  distribution 
department  was  much  better  than  the  records  had  indicated.  Fur- 
thermore it  was  found  that  the  claim  made  that  the  old-style 


Lecture  Notes. 


173 


benches  were  as  efficient  as  the  improved  (regenerative)  benches 
was  entirely  without  warrant. 

When  we  are  called  in  as  engineers  to  investigate  any  pro- 
position as  to  the  worth  of  a  plant  or  a  business,  we  at  once 
have  to  call  in  our  powers  of  analysis.     A  man  who  is  not  capa- 
ble of  fairly  and  intelligently  analyzing  data  is  worthless  as  an 
investigator.     A  large  part  of  my  professional  life  has  been  spent 
in  the  investigation  of  claims  more  or  less  extraordinary.     I 
believe  I  am  correct  in  saying  that  in  a  majority  of  these  cases 
where  specific  claims  had  been  made  as  to  quantity  and  quality 
of  product,  upon  going  to  the  works  to  investigate,  it  has  been 
discovered  that  there  were  no  means  on  the  ground  for  com- 
pletely measuring  quality,  or  quantity  or  both,  and  that  these 
extraordinary  claims  had  been  derived  from  more  or  less  elabor- 
ate systems  of  estimation  in  which  the  wish  was  father  to  the 
claim.     For  instance,  I  at  once  call  to  mind  one  case  where 
the  most  extraordinary  statements  had  been  made  in  regard  to 
the  quantity  of  gas  produced  from  a  given  quantity  of  coal. 
These  statements  had  been  widely  accepted  and  many  men  of 
standing  in  the  business  world  had  been  induced  to  invest  in 
the  company  controlling  the  process.     Certificates  had  been  fur- 
nished  by   engineers   who   were  supposed   to   be   capable   and 
honest.     When  we  undertook  the  investigation,  we  found  that 
there  was  no  station  meter  for  measuring  the  quantity  of  gas 
produced,  and  the  measuring  was  done  by  noting  the  rise  and 
fall  of  a  gas  holder,  and  this  without  allowing  for  change  of 
temperature    which   amounted   sometimes  to  as  much   as  40° 
Fahr.     Furthermore,  it  was  found  that  the  amount  of  coal  used 
had  been  determined  by  the  use  of  small  platform  scales    and 
that  there  was  no  evidence  that  the  coal,  as  supplied  to  the  ap- 
paratus, had  always  been  weighed.     The  records  of  ordinary 
laborers  had  been  taken  in  this  case.     When  we  came  to  check 
up  the  treasurer's  books  with  the  coal  pile,  we  found  that  the 
latter  was  **short"  and  that  nearly  twice  as  much  coal  had  been 
used  as  had  been  included  in  the  statements  of  cost. 

Again,  in  the  case  of  gas  process  investigations  we  have 
to  test  the  claims  as  to  quality  by  accurate  measurements  of 


174 


Business  Engineering. 


it 
If 

.'I 


candle  power  and  calorific  value.     I  call  to  mind  a  case,  and  a 
most  important  one,  where  the  gentleman  whom  I  was  assisting 
had  come  from  Europe  for  the  express  purpose  of  investigraing 
the  claims  made  for  a  certain  process.     The  investigation  was 
earned  on  through  a  number  of  different  works.     At  one  of 
these,  when  we  came  to  use  the  photometer  to  determine  the 
candle  power  of  the  gas,  we  found  that  the  sight  box  could  be 
moved  through  a  range  of  four  candles  without  making  any 
marked  difference  in  the  distinctness  of  the  image  on  the  disc 
and,  yet,  this  photometer  was  in  charge  of  a  man  who  had  an 
unusually  good  reputation  for  his  ability  in  laboratory  observa- 
tions.    I  think  of  another  instance  where  a  certain  engineer  had 
been  for  years  claiming  that,  by  his  method  of  scrubbing  and 
condensing,  the  gas  acquired  or  retained  an  additional  illuminat- 
ing  value  of  two  candles.     Later,  these  works  came  under  my 
direction    and  I  found  that  the  photometer  upon  whose  accuracy 
these  claims  for  increased  eindency  depended  was  out  of  adjustment 
at  a  number  of  points,  the  candle  balance  was  non-sensitive  and 
the  Bunsen  disc  had  been  in  use  for  about  ten  years  and  had 
long  since  outlived  its  usefulness.     As  soon  as  the  photometer 
was   re-equipped   and    re-adjusted   it   was    found    impossible   to 
detect  any  increase  in  candle  power  due  to  this  special  method 
of  scrubbing  and  condensing.     Still,  these  claims  had  been  ac- 
cepted on  the  reputation  of  the  inventor  and  considerable  appara- 
tus  had  been  sold  by  reason  thereof. 

In  making  our  comparisons  on  the  relative  cost  of  product 
or  on  relative  efficiency  of  plant,  we  must  be  careful  not  to  mag- 
nify the  importance  of  any  one  item  at  the  expense  of  any  other 
Item,  or,  worse  yet,  at  the  expense  of  all  the  other  items.  While 
the  case  must  be  considered  with  regard  to  each  of  the  indi- 
vidual Items,  we  must  also  consider  the  case  as  a  whole. 

Again,  I  am  reminded  of  an  experience  where  we  were 
endeavoring  to  eliminate  a  waste  due  to  heat  escaping  from  a 
certain  piece  of  apparatus.  We  devised  an  addition  to  the  ap- 
paratus which  was  intended  to  recover  a  large  portion  of  this 
heat.  At  first  the  result  was  most  encouraging  and  we  were 
apparently  making  a  satisfactory  saving  on  each  thousand  feet 


r 


Lecture  Notes. 


175 


of  gas  produced.  At  the  end  of  six  months,  however,  the  re- 
pairs on  this  additional  apparatus  had  increased  until  the  cost 
for  repairs  was  twice  as  much  per  thousand  as  the  apparent 
saving. 

In  making  our  investigations,  we  should  be  sure  that  the 
instruments  used  for  our  measurements  are  completely  adjusted 
and  standardized.  For  instance,  in  the  case  of  gas  investigations 
we  should  be  certain  that  the  means  employed  for  measure- 
ment of  volume  are  correct  and  that  the  photometer  which  is 
used  for  the  measurement  of  candle  power  is  accurate.  We 
should,  still  further,  be  positive  that  the  gas  we  are  measuring 
is  the  gas  that  is  being  produced.  I  recall  an  instance  where, 
after  two  weeks  of  hard  work,  the  men  engaged  on  the  investi- 
gation found  that  they  had  been  measuring  for  candle  power 
gas  taken  from  another  pipe  than  the  one  they  had  supposed. 
In  other  words,  their  measurements  of  volume  were  correctly 
taken  but  the  measurements  for  quality  were  made  on  gas 
produced  by  another  apparatus. 

I  will  give  you  another  instance  by  quoting  from  a  letter 
received  not  long  ago: 

"Recently  we  had  occasion  to  make  a  fuel  test  and  I  found 
that  the  man  in  charge  failed  to  properly  test  the  scales  before 
use. 

"He  was  weighing  wagons  of  approximately  1,800  pounds 
each.  The  test  he  made  of  the  scales  was  to  stand  a  man  in 
the  centre,  get  his  weight,  stand  him  at  each  corner  and  get 
his  weight,  and  find  that  each  time  the  weight  of  the  man  was 
shown  to  be  the  same  as  when  he  was  weighed  on  the  standard 
scales.  This  was  regarded  as  satisfactory  evidence  that  the 
scales  were  correct.  I  believe  that  further  it  was  determined 
that  the  scales  worked  freely— turning  for  a  small  additional 
weight,  and  that  everything  was  clean  about  the  pit. 

"After  the  test  had  gone  on  for  some  time  it  was  found 
that  the  scales  were  not  weighing  the  same  as  another  set  of 
scales,  and  it  was  ascertained  that  the  platform  and  its  supports 
were  not  sufficiently  rigid  and  had  been  bent  under  the  1,800 
pounds  weight." 


176 


Business  Engineering. 


■W' 


that   het      o     :'a:   el,    "^'^^'°"^  ^'  ^'''^"'^  '^  -- 
Plete  statements  of  facranH^l'"^,^'  ^'"'"^  ~"^«  ^"^  ^°'"- 

selves.     When  wrdo?.  "^  ^T    "  ^''  "^  investigating  for  our- 

cause  we  have  jtsl  alJ^Sy  t^f 't '  ^'°""^  ''^  '"^- 
therein,  or  we  should  n  L,f  statements  contained 

by  stating  our  authorir       °"  '''*'"'"*^'  "'"^  """^^^^' 
Or  to  state  it  more  briefly  :— 
Be  thorough. 
Do  not  be  led. 
Keep  your  wits  about  you. 
Use  your  common  sense. 
State  what  you  know. 


ESTIMATES  AND  SPECIFICATIONS- 

December^  1904. 

Incomplete  as  this  collection  of  Lecture  Notes  is,  failing  as 
It  does  to  specifically  touch  upon  some  important  business  fea- 
tures of  engineering  practice,  I  feel  that  some  definite  reference 
to  estimates  and  specifications  must  be  included. 

In  my  talks  I  have  frequently  made  incidental  reference  to 
this  branch  of  my  subject,  and  especially  when  describing  and 
illustrating  the  use  of  the  statistical  and  auxiliary  books  which, 
combined  with  the  regular  books  of  account,  should  provide  a 
complete  record  of  the  transactions   of  an  industrial  concern. 

First  we  have  to  bear  in  mind  that  we  must  consider  this 
subject  from  the  standpoint  of  the  buyer  and  also  from  that  of 
the  seller.  Some  of  you  as  contracting  engineers  or  manufac- 
turers will  have  to  submit  to  the  stipulations  contained  in  the 
specifications  and  contracts  prepared  for  your  guidance  and 
control.  Some  of  you  after  so  contracting  may  sublet  parts 
of  your  contract  to  others  and  so  become  interested  in  the 
preparation  of  such  specifications  and  contracts  as  will  in  turn 
guide  and  control  those  whom  you  are  bringing  in  to  share 
your  responsibilities. 

Again,  some  of  you  as  consulting  engineers  may  have  to 
occupy  a  more  neutral  position  in  representing  the  purchaser, 
or  standing  between  the  purchaser  and  the  manufacturer  or 
contractor. 

So  what  I  have  to  say  should  be  capable  of  fair  applica- 
tion by  either  party  to  a  transaction  in  which  is  involved  an 
estimate,  a  specification  and  finally  a  contract. 

In  case  of  any  piece  of  work  to  be  performed  the  first  thing 
required  preliminary  to  a  contract,  is  that  the  exact  character  of 
the  work  shall  be  fully  and  explicitly  defined. 

This  calls  for  the  preparation  of  exact  and  comprehensive 
engineering  drawings.     While  I  know  that  this   part   of  your 


178 


Business  Engineering. 


technical  training  has  been  fully  cared  for  in  other  of  our  de- 
partments, still,  before  passing  on  let  me  emphasize  as  an 
important  feature  of  engineering  practice  that  all  engineering 
drawings  should  be  completely  self-explanatory  and  should  be 
checked  up  in  every  possible  way  before  we  employ  them  in 
connection  with  a  specification  as  part  of  a  contract.  Unfor- 
tunately, it  is  too  common  an  occurrence  to  find  that  the  several 
parts  of  a  drawing  or  set  of  drawings  do  not  support  each  other 
as  to  dimensions  or  features  of  design  or  both. 

For  a  piece  of  work  of  any  importance  specifications  should 
be  carefully  prepared  and  made  to  agree  in  every  particular 
with  the  engineering  drawings.  It  will  frequently  be  found 
that  the  effort  to  bring  about  this  agreement  will  indicate  the 
necessity  for  modifying  the  drawings  or  the  specifications  or 

both. 

For  the  moment,  I  cannot  think  of  any  one  thing  mcluded 
in  engineering  practice  which  is  of  such  vital  importance  from 
both  the  technical  and  the  commercial  standpoints  as  this 
preparation  of  drawings  and  specifications  complete,  comprehen- 
sive and  exact  in  all  necessary  details  and  in  perfect  harmony 

with  each  other. 

In  the  case  of  work  of  any  magnitude,  only  by  such  complete 
planning  ahead  can  the  best  possible  result  be  obtained  from 
the  minimum  of  capital  expenditure.  Here  it  is  to  be  seen  how 
the  technical  and  commercial  features  of  engineering  practice 
are  interwoven  from  the  very  beginning  of  any  industrial  under- 

takinsT. 

Where  a  certain  class  of  work  is  being  frequently  repeated, 

with  comparatively  minor  modifications  to  meet  local  or  special 

conditions,  standard  drawings  and  standard  specifications  should 

be  developed.     As  soon  as  any  difficulty  appears  in  connection 

with  any  one  undertaking  from  which  we  can  gather  experience 

for  future  application,  the  standard  drawings  and  specifications 

should  be  modified ;   or,  if  a  general  modification  is  not  deemed 

advisable,  notes  should  be  made  for  our  guidance  in  any  similar 

future  case. 

If  in  the  same  business  a  number  of  lines  of  work  are  fol- 


li" 


Lecture  Notes. 


1/9 


lowed,  as  many  sets  of  standard  drawings   and   specifications 
should  be  prepared. 

For  each  special  line  an  estimate  book  should  be  developed 
in  which  there  shall  appear  every  item  that  experience  has  shown 
will  be  required.  This  in  turn  should  be  supplemented  when 
experience  shows  us,  as  it  unquestionably  will,  that  in  our 
previous  estimates  some  items  were  omitted.  The  last  item  on 
the  list,  one  that  should  never  be  omitted,  is  that  of  contin- 
gencies; for  no  matter  how  careful  or  conscientious  we  have 
been  to  include  separately  all  sources  of  expense  there  will  be 
some  omitted.  For  in  every  engineering  undertaking  in  which 
variations  are  introduced  through  change  of  location  or  other  of 
the  limiting  conditions,  there  will  be  required  a  change  in  our 
specifications.  Furthermore  we  must  include  a  contingency 
item  because  we  cannot  determine  in  advance  the  cost  of  the 
unavoidable  chances  which  enter  into  the  performance  of  every 
piece  of  engineering  work  of  any  importance.  Some  engineers 
provide  for  contingencies  by  making  a  liberal  estimate  of  cost 
on  each  important  item.  I  prefer  to  place  against  each  item 
what  I  believe  will  be  its  cost  as  exactly  as  I  can  estimate  it  on 
present  market  conditions  and  then  add  one  item  for  contingen- 
cies, say  in  ordinary  cases  lo  per  cent,  of  the  total  cost  of  all 
the  specific  items.  The  cost  of  each  item  must  include  the  cost 
of  placing  the  material  or  the  men  on  the  ground  where  the 
plant  is  to  be  erected  or  we  must  include  as  separate  items  the 
cost  of  transportation,  including  freight,  carting,  insurance,  &:c. 
In  making  up  the  items  of  an  estimate  we  must  be  careful  to  see 
that  there  is  no  gap  between  the  items  which  cover  transporta- 
tion and  the  items  which  cover  erection.  Not  infrequently, 
actual  cost  exceeds  estimated  cost  because  material  has  to  be 
stored  and  rehandled  after  delivery  and  before  erection  or  be- 
cause wages  have  to  be  paid  to  men  waiting  for  the  opportunity 
to  commence  their  work. 

An  intelligently  prepared  estimate  book  can  be  made  to 
be  worth  many  times  its  weight  in  gold.  Such  a  book,  modified 
and  corrected  from  experience  is  of  the  utmost  value  in  the 
preparation    of    specifications    for    future    undertakings.      Its 


II 


I 


i8o 


Business  Engineering. 


records,  including  the  special  data  in  each  case,  should  supply 
the  means   for  making  as  correct  an   estimate  as  is  possible. 
But  even  if  we  exercise  all  possible  care  and  intelligence  to 
correctly  cover  all  other  items  of  cost,  this  item  of  contingencies 
cannot  safely  be  omitted,  and  in  certain  special  cases  it  must 
provide  for  elements  so  uncertain  in  their  character  that  a  con- 
siderable risk  must  be  taken  or  a  large  amount  must  be  in- 
cluded to  ensure  safety.     If  the  estimate  is  prepared  as  the  basis 
for  a  competitive  bid  on  work  to  be  performed,  such  a  necessarily 
large  contingency  item  may  be  a  decided  disadvantage,  for  one 
or  more  of  the  other  bids  may  be  offered  by  those  reckless  or 
dishonest   enough  to  take   their   chances   without   so    ensuring 
themselves   against   loss,   on   the   theory   that   if   the   cost  goes 
against  them  they  will  be  able  to  escape  from  the  full  force  of 
the   contract   by   one   means   or   another.     In    such   cases,    the 
honest  and  careful  contractor  cannot  allow  himself  to  be  in- 
fluenced by  fears  as  to  what  his  competitor  may  be  willing  to  do. 
From  an  estimate  book  such  as  I  have  outhned,  another 
book  can  be  developed,  which  may  be  employed  to  the  greatest 
advantage  in  the  actual  performance  of  the  work.     As   work 
under  a  contract   progresses,   especially   if  the   work  is   being 
executed  at  a  point  far  removed  from  the  home  office,  it  is  of 
vital  importance  that  those  who  are  responsible  at  the  home 
office  for  keeping  the  resident  engineers  supplied  with  the  neces- 
sary material  and  men,  should  constantly  have  before  them  a 
record,  correct  to  date,  of  the  ordering  and  forwarding  of  ma- 
terial and  men  and  of  their  arrival  or  non-arrival  on  the  ground. 
This  book  then  should  have  columns  so  prepared  that  against 
each  item  can  be  recorded  all  the  various  steps  taken  between 
the  ordering  and  the  actual  completion  of  the  work.     It  is  there- 
fore important  that  spaces  should   be   provided   for   necessary 
notes   in   regard   to  working  drawings   and   modifications   and 
additions  thereto,  the  necessity  for  which  may  develop  as  the 
work  progresses. 

The  resident  engineer  should  be  notified  of  all  drawings, 
material  and  men  forwarded  and  he  should  be  required  to 
promptly  acknowledge  their  receipt.     All  these  steps  should  be 


t 


I 


Lecture  Notes. 


i8i 


noted  in  this  estimate  or  contract  record.  The  notifying  of  the 
resident  engineer  may  well  be  done  through  carbon  copy  books, 
so  that  we  may  be  sure  that  the  original  sent  to  him  is  an  exact 
duplicate  of  the  carbon  copy  retained  in  the  home  office.  These 
carbon  copy  books  may  be  conveniently  used  for  illustrating  by 
sketches  minor  details  required  to  modify  or  further  explain 
features  of  construction  on  which  questions  have  arisen  during 
the  progress  of  the  work  and  which  have  been  referred  to  the 
home  office  for  further  explanation  or  decision.  The  orders  for 
material  should  also  be  made  out  on  carbon  copy  books  so 
that  one  copy  may  be  sent  to  the  concern  from  which  the 
material  is  ordered,  one  copy  to  the  resident  engineer  in  charge 
of  the  erection  and  the  third  retained  in  the  home  office. 

As  I  have  said,  every  one  of  these  steps,  as  they  are  taken, 
should  be  noted  in  the  Contract  Record  Book  according  to  a 
prearranged  system.  The  final  vertical  column  in  this  record 
should  be  one  to  show  the  total  cost  of  each  item,  there  being 
other  columns  to  show  how  this  final  cost  is  made  up. 

When  the  contract  is  completed  this  contract  or  estimate 
record  should  be  checked  up  with  the  treasurer's  books  to  make 
sure  that  the  cost  as  shown  in  the  book  which  is  to  guide  us  in 
future  estimates  exactly  corresponds  as  to  total  cost  with  the 
figures  shown  in  the  regular  books  of  account.     To  the  inex- 
perienced student  it  may  seem  strange  that  I  take  the  time  to 
make  this  point;    but  this  is  vital  in  the  operation  of  such  a 
scheme  as  I  have  now  barely  outlined.     It  is  true,  unfortunately, 
that  here  and  in  many  other  directions,  the  statistical  and  auxiliary 
books  of  an  industrial  concern  are  not  always  made  to  balance  with 
the  regular  books  of  account.     Very  often  these  two  classes  of 
books  are  kept  in  different  departments — the  regular  books  of 
account  in  the  Commercial  Department  and  the  auxiliary  books 
in  the  Engineering  or  Construction  Department;    and    not  in- 
frequently, sufficient  friction  exists  between  these  two  depart- 
ments to  prevent  them  from  loyally  co-operating  to  obtain  a 
complete   result,   so   necessary   for  the   good    of   the   business. 
The  man  then  who  is  responsible  for  the  business  as  a  whole 
should  see  to  it  that  this  co-operation  is  developed  and  con- 


1 


■^«?^!^y#»?3 


182 


Business  Engineering. 


stantly  maintained.  But  if  the  manager  is  a  technically  trained 
engineer  who  regards  bookkeeping  as  something  below  his 
dignity  as  a  professional  man,  he  will  not  be  ready  in  the  first 
place  to  call  for  such  co-operation  nor,  in  the  second  place,  will 
he  be  competent  to  ensure  it  by  proper  supervision  and  direction. 

Now  let  us  go  back  to  the  more  specific  consideration  of  the 
preparation  of  the  specifications. 

It  can  readily  be  seen  that  an  estimate  book  such  as  I  have 
outlined  can  be  employed  to  great  advantage  in  the  preparation 
of  specifications,  provided  the  concern  which  operates  the  book 
is  responsible  for  the  preparation  of  the  specifications.  Such  is 
not  always  the  case,  but  often  it  is  so. 

Even  in  the  case  of  a  consulting  engineer,  some  such  record 
as  I  have  outlined  would  be  convenient,  if  not  actually  necessary. 
Again,  frequently  the  one  charged  with  the  responsibility  of 
preparing  the  final  detailed  specifications,  which  after  acceptance 
are  to  be  attached  to  and  become,  with  the  drawings,  a  part  of 
the  contract,  is  the  contractor. 

If,  on  the  other  hand,  the  bids  are  called  for  by  a  concern 
which  is  not  definitely  informed  as  to  what  should  be  required 
under  the  proposed  contract,  the  probabilities  are  that  such  a 
concern  will  call  in  to  its  aid  a  consulting  engineer  or  put  itself 
at  once  in  the  hands  of  some  contracting  specialist  who  has 
by  his  integrity,  common-sense  and  professional  ability  earned 
for  himself  a  reputation  upon  which  broad-minded  business  men 
will  be  willing  to  place  their  dependence  ahead  of  everything 
else. 

Suppose  now  we  have  prepared  an  estimate  in  our  esti- 
mate book  as  the  basis  for  a  bid,  this  bid  to  be  accompanied  by 
a  specification,  more  or  less  clearly  itemized  according  to  the 
present  requirements.  The  details  as  given  in  our  book  may 
be  quite  plain  to  us,  but  now  the  question  comes  up,  will  they 
be  perfectly  plain  to  the  other  party  to  our  proposed  contract? 
This  at  once  brings  to  our  notice  the  fact  which  I  so  frequently 
try  to  impress  upon  you,  that  a  sound  working  knowledge  of 
the  mother  tongue  is  of  vital  importance  to  the  engineer.  Not 
only  must  the  specification  convey  to  us  a  description  of  the 


Lecture  Notes. 


183 


items  covered  in  our  estimate,  but  it  must  convey  that  meaning 
to  the  other  party  of  the  proposed  contract. 

While  it  is  desirable  that  the  specification  shall  be  expressed 
in  language  precise  and  concise,  it  is  far  more  desirable  that  it 
shall  be  expressed  in  language  admitting  of  only  one  meaning, 
no  matter  how  inelegant  that  language  may  be.     We  should 
not  hesitate  to  use  the  same  words  over  and  over  if  we  are 
sure  that  our  meaning  can  be  thus  made  more  certain  of  correct 
interpretation.     We   must  bear  in   mind   that   if  we   make   an 
apparently  plain  and  simple  statement  of  fact  before  an  audience 
Hmited  in  number,  hardly  two  of  the  listeners  in  that  audience 
will  have  conveyed  to  his  mind  by  the  spoken  words  exactly 
the  same  impression.     This  should  constantly  influence  us  to 
exercise  watchfulness  and  care  even  in  the  preparation  of  our 
less  formal  business  communications.     As  I  have  pointed  out 
in  my  talks  on  commercial  law,  much  of  our  correspondence  is 
to  be  classed  as  the  groundwork  for  contracts  of  one  kind  and 
another,  and  carelessness  in  expression  may,  to  our  surprise  and 
disgust,  lead  us  into  annoying  and  expensive  lawsuits.     I  have 
also  shown  you  from  my  own  experiences  how  the  haste  which 
leads  us  to  write  communications  that  are  not  completely  self- 
explanatory  in  the  first  instance  entails  upon  the  sender  and  the 
receiver  the  expenditure  of  time  and  nerve  energy  many  times 
greater  than  that  which  would  have  sufficed  in  the'  beginning  to 
have  made  the  initial  communication  complete.     You  will  re- 
member that  I  gave  one  instance  where   I  arranged  for  the 
exhaustive  analysis  of  all  of  one  class  of  correspondence  pass- 
ing through  a  certain  office  during  six  months.     The  result  was 
a  surprise  to  all  concerned.     It  was  found  that  the  record  of 
letters  written  which  would  have  been  unnecessary  had  the  in- 
itial communications  been  correct  and  complete  in  every  detail, 
ranged  from  102  letters  explaining  and  correcting    6    monthly 
reports  to  10  letters  explaining  and  correcting  9  monthly  reports. 

Bear  in  mind  that  many  of  these  men  whose  records  were 
so  analyzed  were  technical  graduates. 

For  the  warning  of  those  of  you  who  are  inclined  to  slight 
what  some  ignorantly  and  foolishly  classify  as  little  things,  and 


i84 


Business  Engineering. 


Lecture  Notes. 


185 


for  the  encouragement  of  those  of  you  who  are  thorough  and 
conscientious  in  details,  let  me  point  out  that  in  the  business  world 
where  such  inability  and  indifference  or  lack  of  conscientious- 
ness are  continually  made  apparent  in  unsatisfactory  results, 
how  the  over-worked,  harassed  manager  of  today  must  turn  with 
open  arms  to  the — I  am  sorry  to  say — exceptional  employe  who 
lightens  his  pressing  burdens  by  completely  performing  the  tasks 
assigned  to  him.  Young  men  often  complain  to  me  because, 
as  they  say,  there  are  not  the  same  opportunities  to  make  their 
way  as  there  used  to  be.  There  always  will  be  this  opportunity 
for  the  capable,  thorough  and  conscientious  men  any  time  this 
side  of  the  Millennium,  and  that  is  about  as  far  as  we  need  look. 
In  spite  of  all  the  care,  intelligence  and  specialized  training 
which  may  be  exercised  in  the  preparation  of  specifications  it 
is  still  impossible  to  avoid  all  mistakes  and  disputes  as  to  inter- 
pretation. 

Apart  from  differences  of  interpretation  of  words,  meant  by 
the  engineer  to  express  a  definite  thought  or  intention  on  his 
part,  cases  must  arise  where  it  becomes  necessary,  or  is  con- 
sidered advisable,  to  modify  the  original  plans  by  reason  of  facts 
which  first  come  to  light  after  the  work  has  been  begun. 

The  items  for  extras  are  a  fruitful  cause  for  dispute  in  con- 
nection with  the  settlement  of  contracts.  Unfortunately,  some 
contractors  endeavor  to  provide  in  their  contracts  a  place  for 
the  later  introduction  of  extras,  hoping  thereby  to  get  pay  at 
higher  rates  for  part  of  the  work  and  at  the  same  time  lead  the 
other  party  on  to  the  making  of  a  contract  by  holding  out  the 
bait  of  a  low  lump-sum  contract  price.  The  conscientious  engi- 
neer and  contractor  should  do  all  in  his  power  to  reduce  to  a 
minimum  the  necessity  for  extra  charges. 

When  it  becomes  apparent  that  such  extra  charges  will  have 
to  be  made  or  when  it  becomes  apparent  that  modifications  of 
the  specifications  are  required,  steps  should  at  once  be  taken 
to  arrange  a  supplementary  agreement  between  the  two  parties 
to  the  contract,  rather  than  leave  the  matter  in  indefinite  shape 
as  the  probable  cause  for  dispute  or  possible  litigation  at  the 
time  of  final  settlement. 


The  several  clauses  of  a  carefully  prepared  specification 
may  be  divided  into  two  classes : — 

General  Clauses,  which  define  the  general  conditions  un- 
der which  the  contract  shall  be  executed,  the  relative  responsi- 
bilities of  the  two  parties  to  the  agreement,  the  lines  to  be  fol- 
lowed in  regard  to  acceptance  on  the  part  of  the  buyer,  terms 
of  payment,  and  the  like ;  and 

Specific  Clauses,  which  cover  the  details  of  design  and 
construction. 

It  is  well  to  carefully  separate  and  classify  the  several  items 
of  the  specifications  in  this  way,  bearing  in  mind  that  then  the 
specification  becomes  the  very  substance  of  the  contract. 

The  general  clauses  can  commonly  be  made  standard,  to  ap- 
ply almost  without  alteration  to  all  contracts  of  a  certain  class. 
This  portion  of  the  specification  form  should  therefore  be 
amended  and  added  to  as  experience  suggests.  The  original 
form  and  all  changes  should  be  submitted  for  approval  to  a 
competent  legal  adviser.  It  is  well  here  to  remind  you  that 
whenever  a  doubt  is  suggested  as  to  the  best  form  in  which 
to  express  a  business  paper  so  as  to  secure  the  maximum  of 
protection  under  the  law,  go  to  a  good  lawyer.  You  believe 
it  is  wise  for  those  not  specifically  trained  in  engineering  science 
to  consult  a  specialist  as  questions  in  that  line  arise;  you,  then, 
should  be  prompt  to  recognize  the  wisdom  of  engineers  con- 
sulting lawyers  when  the  special  question  to  be  solved  is  one  of 
the  law. 

I  shall  not  here  attempt  to  set  before  you  specimens  of 
specifications  as  actually  employed  in  the  field  of  engineering. 
Such  examples  would  necessarily  vary  very  greatly  with  every 
branch  of  engineering  considered.  It  would  be  only  in  general 
that  such  examples  could  be  employed  to  advantage  in  such  a 
crowded  course  as  ours  at  ''Stevens,"  especially  as  we  find  by 
our  Alumni  Directory  that  our  graduates  by  no  means  confine 
themselves  to  the  one  branch  of  engineering  which,  for  want 
of  a  better  name,  is  styled  Mechanical  Engineering,  but  are  to 
be  found  occupying  positions  of  importance  in  every  branch 
of  engineering  practice. 


i86 


Business  Engineering. 


W 


I  would  strongly  advise  you,  however,  as  you  settle  down 
to  practice  in  any  one  branch  of  our  profession,  to  make  a 
special  effort  to  collect  representative  specifications  from  en- 
gineers of  good  repute.  These  men  will  frequently  be  found 
willing  to  furnish  such  specification  forms  in  individual  cases 
where  they  might  be  unwilling  to  furnish  them  for  inclusion  in 
these  notes,  which  are  intended  for  more  or  less  general  distri- 
bution. 

I  would  especially  advise  all  of  you  to  procure,  if  possible, 
a  copy  of  the  lecture  on  "Specifications"  delivered  before  the 
Senior  Class  of  Rensselaer  Polytechnic  Institute,  April  30,  1903, 
by  Dr.  J.  A.  L.  Waddell,  of  the  engineering  firm  of  Waddell  & 
Hedrick,  Kansas  City,  Mo. 


I  have  not  so  far  prepared  anything  specific  with  reference 
to  that  important  business  feature  of  engineering  practice ;  name- 
ly, the  necessity  for  practicing  within  the  limits  set  by  com- 
mercial conditions.  I  have  not  thought  it  well  to  longer  hold 
back  the  printing  of  these  notes  for  a  paper  on  this  subject,  for 
three  reasons: — 

1.  Mr.  W.  M.  McFarland's  article,  reprinted  from  Gassier' s 
Magazine^  and  included  in  the  "Reprints  of  Lectures  and  Pa- 
pers," should  be  sufficient,  unsupported  by  further  words  on  my 
part,  to  convince  intelligent  engineer-students  that  the  condi- 
tion named  is  one  with  which  they  must  be  prompt  to  comply ; 

2.  I  am  continually  including  illustrations  of  this  truth  in 
connection  with  all  my  talks  on  the  other  business  features  of 
engineering  practice ; 

3.  It  should  not  be  difficult  for  a  student  possessed  of 
sufficient  intelligence  to  successfully  meet  the  test  of  three  years 
of  our  "weeding-out"  process  to  appreciate  that  an  engineering 
design  or  an  industrial  undertaking  must  necessarily  be  along 
lines  which  will  afford  an  adequate  return  to  the  investor;  that, 
therefore,  the  description  of  the  engineering  project  must  be  such 
as  to  appeal  to  the  banker  who  acts  as  the  intermediary  be- 
tween those  responsible  for  industrial  undertakings  and  the  gen- 
eral investing  public;   and  that  the  honest  and  capable  engineer 


Lecture  Notes. 


187 


must  be  prepared  to  discriminate  between  immediate  and  final 
profit. 

My  experience  with  three  senior  classes  is  in  accord  with 
this  theory.  I  have  found  the  students  more  ready  to  acknowl- 
edge that  commercial  conditions  control  and  limit  engineering 
practice  than  they  are  to  undertake  the  drudgery  of  preparing 
themselves  to  intelligently  and  efficiently  meet  this  condition 
by  familiarizing  themselves  with  business  methods. 

Summarizing  my  instruction  on  the  Business  features  of 
Engineering  practice  I  say — use  your  common-sense  as  cultivated 
and  developed  by  your  "Stevens"  training;  rely  upon  your  rea- 
soning powers  rather  than  your  memory. 

And  finally — Be  true  to  yourselves  and  so  be  true  to  your 
Alma  Mater. 


'<.  II 


!! 


Humphreys 

Lecture  notes  on  engineering 
==r  practice 


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